Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: COMMISSIONER OF INCOME-TAX, EAST ZONE, KARACHI VS Respondent: MERCHANT NAVY- JUDGMENT
Court Name: Sindh High Court Judge(s): Shabbir Ahmed, Muhammad Mujeebullah Siddiqui Title:COMMISSIONER OF INCOME-TAX, EAST ZONE, KARACHI vs MERCHANT NAVY-
JUDGMENT
Reported As: 2004 PTD 1304 Result: Answer in affirmative Judgment JUDGMENT ' MUHAMMAD MUJEEBULLAH SIDDIQUI, J.---In this reference under section 136(1) of the Income Tax Ordinance, 1979, the Income Tax Appellate Tribunal Karachi Bench, has referred following question of law for our opinion:-- "Whether in the facts and circumstances of the case the Appellate Tribunal was justified in holding that the income derived by the assessee from the property and so also from the business carried out by it in the course of carrying out the charitable purpose was exempt from levy of income tax under section 4(3)(i) of the Income Tax Act." ' The statement of facts as submitted by the Income Tax appellate Tribunal (hereinafter referred to as the Tribunal) are that the respondent/ assessee did not file returns of total income and therefore, notices were issued under section 34 of the Repealed Income Tax Act, 1922 (hereinafter referred to as the Repealed Act). In response to the notices, the assessee filed returns showing nil income in the Assessm ent years 1973-74 to 1975-76 on the plea that its income was exempt under section 4(3)(i) of the Repealed Act. The income tax officer did not accept the contention with the following observation:-- "The claim of the assessee has been examined in the light of Judicial proceedings. As is evident from the Memorandum of Association and Rules and Regulations of the Merchant Navy Club, the objects of the club to provide convenience to the seamen of the Merchant Navy. Firstly, sea-men do not constitute a sufficient segment of public a condition absolutely essential for making the club eligible for exemption. Secondly, the purpose of the club cannot be considered to be
---
## Page 2
charitable in the light of the objects of the club as outlined in the Memorandum of Association and Rules and Regulations." ' The assessee preferred appeal before the Appellate Assistant Commissioner of Income-tax without any success. In second appeal before the Tribunal, the assessee's contention was up-held and its income was held to be exempt from levy of Income tax under section 4(3)(i) of the Repealed Act, with the following findings:- "Both the officers below, in our opinion, have fallen into an error in holding that the assessee was not a charitable society in that the officers and sea-men for whose benefit it was established were not the sufficient segment of society. In our opinion, the officers and sea-men constitute a very pertinent segment of society and the object provides for the accommodation, recreation and their general welfare and particularly to provide a comfortable home at a moderate charge, cannot but be said to be a charitable purpose. Likewise, the other objects of the society, such as to, provide a refuge to the officers and sea-men who are shipwrecked and in distress and to impart useful knowledge to them in suitable manner etc., are obviously covered by the term `charitable purpose' and manifestly fall within the purview of the expression 'objects of general public utility.' The section of community, in the instant case, to be benefited is sufficiently defined and identifiable by common quality uniting them (the beneficiaries) into a class. We are satisfied from the material record that the income of the assessee was admittedly derived from the property owned by the assessee and by carrying on the business for charitable purposes and the income so derived has been utilized solely for achievement of the purposes set out in the Memorandum of Association. The Explanation appended to section 3 defines the expression chartiable purposes' not exhaustively but inclusively and according to it the advancement of any other object of general utility falls within the ambit thereof." ' The Commissioner of Income-tax feeling aggrieved submitted reference application and the Tribunal referred the question reproduced in the earlier part of this judgment. ' We have heard Mr. Nasruallah Awan, learned counsel for the department and Mr. Muhammad Farid, learned counsel for the respondents/assessee. ' Mr. Awan, has submitted that two aspects require consideration, first, whether the purpose for which the respondent's club was established amounts to charitable purpose and secondly, whether sea-men form sufficient segment of public as envisaged under section 4(3)(i) of the Repealed Act. Although, the Trust Deed or Articles and Memorandum of Association or the Rules/Regulations of the respondents club were not produced at any stage of the proceedings, however, it is stated in the order of IAC, that the income of the respondent has been derived from sale of wine, catering, tobacco and cigarettes, minerals, shop goods. It is further stated that income is also derived from billiard, donations, empties, rent from sub-letting, dividend on NIT units, interest on debentures. It is also stated in the order of IAC, that the affidavit sworn on behalf of respondent that the income was being earned by providing facility of dancing as well. Mr. Muhammad Farid, learned counsel for the respondent, has admitted the above facts and has stated that during the World War-II, the British Merchant Navy was short of facilities. Consequently, the club was established for providing facilities to the sea-men and particularly to the wrecked ships who were in distress. In the Tribunal's order the purpose of establishing the respondent's club has been more elaborately described with reference to the Memorandum of Association was Rules and Regulations. It is observed that the respondent's club was a, non-profit making organization and its main objects, inter-alia provide as under:-- "(a) To provide for the accommodation, recreation and general welfare of the officers and sea- men of the Merchant Navy frequenting or visiting the port of Karachi and particularly to provide a comfortable home where such officers and sea-men may get board and lodging at a moderate charge.
---
## Page 3
(b) To provide a refuge for officers and sea-men who are shipwrecked and in distress: (c) Generally to protect and further the interest of the officers and sea-men and diffusion of useful knowledge in such manner as may from time to time appear necessary or advisable for the purpose, to maintain the aforesaid clubs hereinafter referred to as the Merchant Navy Club and the Asian Sea-men's Club and to see that no distinction on account of nationality or religion shall be made in admitting officers and sea-men in the aforesaid club and to participation in the amenities offered therein." ' It was further stated before the Tribunal that the Appellate Commissioner has observed out of context that, the club has been selling liquor and permitting dancing amongst strangers (men and women), catering to the services of liquor and the income derived can not be categorized in any manner for the benefit of the public. It was explained that certain Artists used to give their performance as ordinary service free of charge in the respondent's club and the main object of establishing the club was to provide for the accommodation., recreation and general welfare of the officers and the sea-men of the Merchant Navy visiting the port of Karachi and particularly to provide comfortable home where such officers and sea-men may get board and lodging at a moderate charge; to provide a refuge for officers and sea-men who are shipwrecked and in distress. Further the club was established to promote goodwill and friendliness, diffusion of useful knowledge by means of social gatherings, entertainment, dances, functions and other amenities, and to do all other things as are incidental or conducive to protect and further the interests of the officers and sea-mean. The case of the respondent's club before the Tribunal was that the primary and dominant purpose of the respondent's club/society was charitable and the business which was being carried out by the respondent's was wholly incidental for achieving the objects of the respondent's/assessee-society and the entire income arising from the business carried on by the respondent was applied to the charitable objects of the assessee. ' The Tribunal has further narrated the facts in its order deciding the appeal and has observed that. The respondent/assessee-society came into being in 1944 by the amalgamation of two clubs, namely Merchant Navy Club, and the Mohnio Memorial Marine Club and was registered in that year under the Registration of Societies Act XXI of 1860, for the objects enumerated in the order of Tribunal. The plot of land on which the Merchant Navy Club is built was given by the K.P.T., free of cost on paper-corn-rent. The Chairman of the KPT is the Ex-officio Chairman of the society which is being run on non-profitable basis. ' On the basis of above facts, the learned Tribunal held that the respondent's society was established for a charitable purpose and advancement of an object of public utility. ' We will consider the issue referred to us on the basis of facts as contained in the order of learned Tribunal. ' Mr. Nasrullah Awan, learned counsel for the department has submitted that on the basis of facts contained in the order of Tribunal, the object for which the respondent's club has been established cannot be held for charitable purposes and secondly, the services provided by the respondent/assessee is restricted to sea-men only and therefore, it cannot be held for the advancement of any object of general public utility as envisaged in Explanation to section 4(3)(i) of the Repealed Act. In support of his contention he has placed reliance on the following judgments:-3 (I) Commissioner of Income Tax v. Muhammad Abdur Rauf Khan PLD 1963 SC 209. (2) Sadar Anjuman-I-Ahmedia, Rabwa v. Commissioner of Income Tax PLD 1977 Lah. 1121 ' On the other hand Mr. Muhammad Farid, learned counsel for the respondent has supported the findings of Tribunal. He has urged that the Tribunal has rightly held that the respondent club was established for a chartiable purpose and advancement of an object of the general public utility. He has maintained that the finding of the Tribunal is in consonance with the ratio of the judgment of
---
## Page 4
Supreme Court of India, in the case of CIT Madras v. Andhra Chamber of Commerce (1965) 11 Taxation 306. Mr. Muhammad Farid, has submitted that the expression object of general public utility is not restricted to the object beneficial to whole of man kind. According to him an object beneficial to section of public is, an object of general public utility. He has further submitted that the definition . Of charitable purposes given in explanation to section 4(3) of the Repealed Act, is inclusive and is not exhaustive or exclusive and therefore, the object for which the respondent's club was established, squarely fell within the scope of "general public utility". He has supported the view of Tribunal that the officers and sea-men, constitute sufficient segments of society and, therefore, amounts to charitable purpose, as envisaged under section 4(3)(i) of the Repealed Act. He has also supported the finding of the Tribunal that the other purposes of the respondent's club which include providing of refuge to the officers and sea-men who are shipwrecked and in distress, by various means also fall within the object of 'general public utility'. He has contended that the section of community in the instances case is fully defined and consequently, the finding of Tribunal is not open to any exception. In support of his contention Mr. Muhammad Farid has placed reliance on the following judgments:-- (1) Fauji Foundation v. Shamimur Rehman PLD 1983 SC 457; (2) Commissioner of Income-tax, Madras v. Andhra Chamber of Commerce 1965 11 Tax 306 (SC India); (3) Commissioner of Income-tax v. West Pakistan Management Association (1985) 52 Tax 1 (H.C. Kar); (4) Commissioner of Income-tax v. Banaras Bras Merchant and Manufacturers Association, (2000) 82 Tax 120 (Allahabad High Court); (5) Pakistan Seamen Contributory Welfare Fund v. Income Tax Appellate Tribunal 1993 PTD 734; (6) Hamdard Dawakhana v. Commissioner of Income Tax, Karachi 1985 PTD 287 and (7) Commissioner of Income-tax, Bombay City v. Breach Canday Swimming Bath Trust, Bombay (1955) 27 ITR 278. ' Mr. Muhammad Farid, has submitted that the learned AAC wrongly placed reliance on the judgment of Hon'ble Supreme Court in the case of Muhammad Abdur Rauf Khan (Supra) and the judgment of Lahore High Court in the case of Sadar Anjuman-i-Ahmedia, Rabwa (supra). According to learned counsel ratio of judgment of Hon'ble Supreme Court in the case of Muhammad Abdur Rauf Khan, was dissented upon by the Hon'ble Supreme Court in the case of Hamdard Dawakhana (Supra) and therefore, the ratio of judgment is not more applicable, and in the case of Sadar Anjuman-I-Ahmedia, reliance was placed on the case of Muhammad Abdur Raud Khan, with the result that the judgment of Lahore High Court is no more required to be followed. ' We have carefully considered the contentions raised by the learned Advocates for the parties. Before appreciating the contentions raised before us, it would be appropriate to re-produce section 4(3)(i) of the Repealed Act, the interpretation whereof is required in the instant case:-- Section 4 (3) Subject to the provisions of this Act, any income, profits or gains falling within the following classes shall not to such extent as may be specified in this subsection or prescribed in this behalf, be included in the total income of the person receiving them:-- (i) Any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application, thereto: ' Provided that in the case of income' derived from business this clause shall not apply unless the business is carried on, on behalf of a religious or charitable institution and the income is applied solely for a religious or charitable purpose of the institution, and either--- (i) the business is carried on in the course of the carrying out of a religious or charitable purpose of the institution; or (ii) the work in connection with the business if mainly carried on by beneficiaries of the institution:
---
## Page 5
' Provided further that nothing in this class shall apply to so much of the income, profits and gains as is not expended during the previous year or set apart for being expended within Pakistan: ' Provided further that if any sum out of the amount so set apart is expended outside Pakistan, it shall be included in the total income of the previous year in which it is not expended or the year in which it was set apart, whichever is the greater, and the provisions of subsection (2) of section 34 shall not apply to any assessm ent or re-assessment, as the case may be, made or to be made in pursuance of this proviso; (ii).................. ' Provided that nothing contained in clause (i) or clause (ii) shall operate to exempt from the provisions of this Act that part of the total income of a private religious trust which does not ensure for the benefit of the public. Explanation.---The expression 'Charitable purposes", as used in clauses (i) and (ii), includes relief of the poor, education, -medical relief and the advancement of any other object of general public utility. ' Now we proceed to consider the rulings relied upon by the learned advocates for the parties. In the case of Muhammad Abdur Rauf Khan (Supra), the provisions contained in section 4(3)(i) came for consideration before the Hon'ble Supreme Court. It was observed that the statute requires a number of conditions of which the following are in this case necessary conditions of qualification for exemption, namely:-- (1) the business should be carried on , on behalf of the religious or charitable institution; (2) the income should be applied solely for a religious or charitable purpose of the institution; and (3) the business should be carried out in the course of the carrying out of a religious or charitable purpose of the institution. ' In this case the sole trustee was plying launch. With reference to the rules and regulations specified in Trust deed, it was held that the launch plying business was not within the purposes for which the trust was established. It was further observed that, "But to secure exemption, it is necessary also that the business should be carried on in the implementation of a religious or charitable purpose of the Trust, and in addition, all the income derived from the business should be applied solely for a religious or charitable purpose of the Trust." It was further observed by the Hon'ble Supreme Court that the provisions of law is to be construed and applied to the facts of each case bearing in mind not only the intention of the main provision allowing exemption but also the duty of ensuring that, on a fair appreciation, both of language as well as of the circumstances, evasion of the tax is not assisted. His lordship S. A. Rahman, J, while construing the proviso to section 4(3)(i) held that, "clause (i) of the proviso appears to contemplate business of character which has a direct and intimate relation with one of the religious or charitable purposes of the institution. For instance, if a charitable institution adopts as one of its objects, the teaching of a profession or trade, to its beneficiaries and starts business strictly for that purpose so that some income accrues to the Trust in the course of running that business intended to train the beneficiaries, the income would be exempt from taxation. If the business be not of that nature, its income would appear to be outside the purview of the exemption altogether. The object may have been to limit the exemption to such subsidiary business only, as was part and parcel of the execution of an object of the charitable institution and to avoid conferring an undue advantage on other business carried on by or under a Trust, in competition with business sponsored by companies or private individuals. This seems to me to be the plain intention of the language of the proviso." In the case of Sadar Anjum-i-Ahmedia, (Supra), a Division Bench of the Lahore High Court considered the provisions contained in section 4(3)(i) of the Repealed Act, with reference to the purposes for which the trust was established. It was observed that a trust must file a return and its claim for exemption could be decided by the department only if the relevant material was placed before it. It was further observed that whether or not a trust is charitable, is a question of law to be
---
## Page 6
decided by the Judge in the light of the circumstances in which the institution or trust came into existence and the sphere in which it operates. The judgment of the Privy Council in D' Aguiar v. Guyana I.R. Comrs (1970) 15 W.I.R. 198 (P.C) was referred, wherein the following rule was laid down:-- "It must first consider the trend of those decisions which have established certain objects as charitable under this heading and ask whether, by reasonable extension or analogy, the instant case may be considered to be in line with these. Secondly it must examine certain accepted anomalies to see whether they fairly cover the objects under consideration. Thirdly and this is really a cross-check upon the others---it must ask whether, consistently with the objects declared, the income and property in question can be applied for purposes clearly falling out side the scope of charity; if so the argument for charity must fail." ' It was observed in para. 9 of the judgment as follows:- "(9) Viscount Simonds in I.R.C. v. Baddeley (1955) AC572 at page 583 observed that there is no limit to a number and diversity of the ways in which man will seek to benefit his fellow-men. He remarked that there is a distinction "between a form of relief extended to the whole community yet by its very nature advantageous only to the few and a form of relief accorded to a selected few out of a large number equally willing and able to take advantage of it. "The former type according to Verge's case (1924) AC 496, did not lack the necessary element to public benefit even though confined to persons living in.a specified area while the latter type did as held in Pemsel's case (1981) AC 531. The ratio decidendi of the above cases appears to, be that if a power of subjective selection of the beneficiaries is conferred on those who are administering a fund the trust will not be charitable." ' In Para. 10 reference was made to the Halsbury's Laws of England as follows:-- "(10) Every object of public utility is not necessarily a good charitable object. The question always is whether the particular object is within the purview of the ancient statute of Elizabeth. Thus bequests for purposes of benevolence or benevolence and liberality, for patriotic, civil or religious, philanthropic, parochial, missionary, pious or Roman Catholic purposes, or `for parish work' or for social or recreational -purposes in connection with certain churches', or for purposes 'most conducive to the good of religion' in a diocese, or for purposes conducive to the attainment of the objects of an association not limited to the advancement of religion, or for helping to carry on the work of the Church in Wales, or for executing the Papal office, or for purposes of hospitality or general utility or for emigration uses or for increasing the sum of available knowledge or for the storage of books, or for the encouragement of a mere sport or game such as cricket, football. Fencing, yachting, bicycling, lawntennis, or any other healthy exercise and recreation primarily calculated to amuse individuals, though such sport may be beneficial to the community, are not charitable; nor is an association to promote athletic sports and general pastimes among members of a police force. Though the provision of the means of public recreation, and also the promotion of moral, social and physical well-being by provision of facilities for religious services and instruction and for social and physical training and recreation have been held charitable, trust for religious, moral, social and recreative purposes have been held not charitable." ' It was further observed that every trust must be beneficial to the public at large or a section of the public and must have charity as its basis and not benevolence. The difficulty in defining the expression charity was realized and it was observed that it was undoubtedly very difficult to define 'charity' with precision. The literature on the point is as vast as despairing. Reference was made in this judgment to the observation of Hon'ble Supreme Court in the Case of M.A. Rauf Khan (Supra) to the effect that by religious and charitable purposes are meant purposes like relief to the poor, education, medical facilities etc. Examining the question whether a purpose can be held to be charitable if it is not meant for the public at large or a sufficient section of a public or community it was held as follows:--
---
## Page 7
"(13) Further, it is well established principle of law of charities that a purpose is not charitable unless its benefit is directed either to the public-at-large or a sufficient section of public or community sufficiently defined or identified by some quality of a public nature as held in Karen Mayemeth be Jisroel Ltd. v. I.R.C. (1932) A.C. 650. An Indian Court took the same view in D.V. Arur v. CIT (AIR .1946 Born. 44). A trust for the members of a religious community associated only for the purpose of working out their own salvation was held invalid in Naville Estates Ltd. v. Madden (1961) 3 All E.R. 769, Re: Banfield v. Smith (1968) 2 All E.R. 276. It was held in Davies v. Perpetual Trustees Co. (1959) A.C. 439 that a gift for Presbyterians who could claim a particular descent was not valid. Thus in Gilmore v. Coats (1949) 1 All E.R. 848 a trust for an association of strictly cloistered and purely contemplative nuns though undoubtedly for the advancement of religion, was held not to be charitable as lacking the element of public benefit. Farewell J. In Re: Delany (1902) 2 Ch. 642 (648-49) observed that: "There is in truth no charity in attempting to prove one's own mind or save one's own soul. Charity is necessarily altruistic and involves the idea of aid or benefit to others." ' The House of Lords in Re: Cox (1955) 1 All E.R. 525 held that trust for employees, ex-employees and dependents was not for a section of public but a creed and so not valid. A trust for members of a trade union which was open to all the members of the printing industry but to which not all the members of the industry in fact belonged, was not…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.