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Petitioner: COMMISSIONER OF INCOME-TAX, WEST BENGAL VS Respondent: BENGAL HOME INDUSTRIES ASSOCIATIONHonorable Justice RAY
1968 P T D 774
1968 P T D 774
[Calcutta (India)]
Before G. K. Mitter and A. N. Ray, JJ
COMMISSIONER OF INCOME‑TAX, WEST BENGAL
Versus
BENGAL HOME INDUSTRIES ASSOCIATION
Income‑tax Reference No. 69 of 1957, decided on 20th March 1962.
Charitable institution‑--Company not for gain‑Object to promote and develop home industries, arts and crafts‑Incidental objects to provide raw materials and purchase and sell finished products‑Whether public charitable institution‑Income‑tax Act, 1922, S. 4(3) (i).
The assessee was a company not for profit, registered under section 26 of the Indian Companies Act, 1913. The primary object of the association was to promote and develop home industries, arts and crafts in the Presidency of Bengal. To achieve that object the assessee was empowered (i) to collect and publish or furnish information with respect to home industries, arts and crafts in Bengal ; (ii) to establish and assist home industries by the purchase of raw materials and articles, by advances of money to encourage manufacture by home industries, by promotion of credit societies or other bodies to improve the work or the condi tion of the workers ; (iii) to promote public displays and raise funds ; (iv) to purchase finished products and sell them and to act as agents for the supply of materials or appliances for the industry ; (v) to hold or acquire land, buildings, etc., for its pur poses. Under clause 4 of its memorandum, the assessee was not to support any endeavour on the part of its members to make it a trading concern. Its income was under clause 5 to be applied solely towards the promotion of and carrying out of its objects and, no portion of it could be paid or transferred directly or indirectly by way of dividend, etc., to its members. In the case of winding up the surplus could not be distributed to its members but had to be transferred to a similar institution:
Held, that the assessee was a public charitable institution and, as such, entitled to exemption under section 4(3) (i) of the Indian Income‑tax Act, 1922.
So long as there is no element of profit‑making so far as the members of an institution are concerned and so long as the in stitution pursues an object which is beneficial to the general public as distinguished from a class or community it is entitled to exemption under section 4(3) (i) of the Indian Income‑tax Act.
All India Spinners' Association v. Commissioner of Income‑tax (1944) 12 I T R 482 (P C) and In re : Trustees of the Tribune, (1939) 7 I T R 415 (PC) fol.
Pigs Marketing Board v. Commissioners of Inland Revenue (1945) 26 Tax Cas. 319; Tennent Plays Ltd. v. Commissioners of Inland Revenue (1948) 30 Tax Cas. 107 ; Commissioners of Inland Revenue v. City of Glasgow Police Athletical Association (1953) 34 Tax. Cas. 76 and Commissioners of Inland Revenue v. Royal Navy and Royal Marine Officers' Association (1954) 36 Tax Cas. 187 distinguished.
Andhra Chamber of Commerce v. Commissioner of Income‑tax (1961) 42 I T R 503 ; Commissioner for the Special Purposes of the Income‑tax v. Pemsel (1891) A C 531; Inland Revenue Commis sioner v. Yorkshire Agricultural Society (1928) 1 K B 611 ; 13 Tax Cas. 58 ; Oxford Group v. Inland Revenue Commissioners (1949) 24 All E R 537 ; and Pharmaceutical Society of Ireland v. Special Commissioners of Income‑tax (1938) I R 202 ref.
STATEMENT OF CASE
These three reference applications are consolidated as a com mon question of law arises from all these applications.
2. By these applications presented on 1st June 1957, the Commissioner of Income‑tax, West Bengal, requires the appellate Tribunal to refer to the High Court a question of law which, is said to arise out of the consolidated order of the Appellate Tribunal dated 15th March 1957, in I. T. As. Nos. 6790, 6791 and 6792 of 1955‑56. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a state ment of case and refer it to the High Court under section 66(1) of the Indian Income‑tax Act.
3. The assessee is an association incorporated under sec tion 26 of the Indian Companies Act, 1913, as a company not for profit. Paragraph 5 of the memorandum of association states that the income, profit add property of the association shall be applied solely towards the promotion of the object of the associa tion and that no portion thereof shall be paid or transferred by way of dividends, bonus or otherwise to the members of the association. Paragraph 6 of the memorandum of association shows that the members of the executive committee and the work ing committee of the association are all honorary persons receiv ing no remuneration: According to paragraph 16 of the articles of association, the only benefits accruing to the members are to vote at general meetings, free admission to, all exhibitions, libraries and meetings of the association, to acquire publications of the association at such reduced rates as the executive commit tee may, from time to time, determine.
4. The function of the working committee of the association is to supervise the accounts and payments of the association and those of the district committees is to circulate the objects of the association and to collect all information with regard to home industries. They act as agents in the matter of carrying out the objects of the association. The memorandum of association sets out the objects in Article 3 as follows:
"3. The objects of the association are to promote and develop home industries, arts and crafts in the Presidency of. Bengal and to do all things necessary for the attainment of the object:
(1) to collect and publish or otherwise furnish information with respect to home industries, arts, or crafts in Bengal ;
(2) to establish or assist home industries‑
(a) by the purchase of the raw materials and articles neces sary for their manufacture, by advance of money or furnishing of guarantees to encourage such manufacture and the acquisi tion of craft secrets, rights or methods of work ;
(b) by promoting the formation of credit societies or other associations having for their object the extension or improve ment of, the work or the condition of the workers in any home industry or the sale of its products ;
(3) to promote exhibitions, show‑rooms or other public dis plays or industrial work and the raising of funds from indivi duals, private or public bodies ;
(4) to purchase, sell or otherwise acquire or dispose of finish ed products, to act as agents for the supply of material or appliances or finished products in connection with any home industry ;
(5) to acquire by purchase, lease or otherwise, and bold lands, buildings and property of every description deemed expe dient for furthering the objects of the association, and also to build, erect and establish any buildings, factories or other structures deemed suitable for the said purpose, and to sell and dispose such lands and property as may be deemed expedient."
A copy of the memorandum and articles of association is made a part of the case and is Annexure "A". The assessee undertakes to submit the printed copy before their Lordships at the time of hearing.
5. The contention of the Income‑tax Department was that relief to the poor was nowhere mentioned in the objects clauses, that promoting exhibitions, show‑rooms or other public displays of industrial work and purchase and sale of finished products, would not constitute the advancement of any object of general public utility. It was contended that clauses 3 and 4 were, clearly non‑charitable and that there was no object which would advance general public utility. It was contended that the beneficiary was only a section of the people who were engaged in home industries, arts and crafts, in the Presidency of Bengal and hence it did not constitute an object of general public utility and that clause 4 referred to above contained an element of trading activity and, therefore, the assessee was not entitled to exemption under section 4(3) of the Indian Income‑tax Act.
6. The assessee contended that the objects referred to above brought into existence a charitable institution and that, in any event, it satisfied the last paragraph of section 4(3) i.e., "advance ment of any other object of general public utility".
7. The Tribunal held that though the objects clause was not properly or happily drafted, it brought out sufficiently the purpose for which the association was formed. The association was formed for the promotion or the development of home industries, arts and crafts, in the Presidency of Bengal. To achieve that object, the association had been empowered to collect and publish or otherwise furnish information with respect to home industries, arts and crafts, to establish or assist home industries by various means, to promote exhibitions, showrooms etc., and by purchas ing the finished product and selling them. It held that though all these activities were set out in the objects clause they were only means to achieve the main object. Purchase and sale was not an end in itself but only a means to promote and develop home industries; arts and crafts. It finally held that the associa tion was a charitable institution within the meaning of section 4(3) (i) of the Act and, therefore, its income was exempt from tax. The order of the Appellate Tribunal is made a part of the case and is Annexure "B".
8. From the above facts 'and circumstances, the following question of law arises:
"Whether, in the facts and circumstances of this case, the association can be held to be a public charitable institution and, as such, entitled to exemption under section 4(3)(i) of the Indian Income‑tax Act."
9. Draft statement of the case was sent to the parties con cerned. The Commissioner of income‑tax has no suggestion. The minor suggestion of the assessee has been appropriately incorporated.
E. R. Meyer with B. L. Pal for the Commissioner.
A. C. Sampath Iyengar with Debi Pal for the Assessee.
JUDGMENT
G. K. MI1TER, J.‑In this reference‑the only question for the opinion of this Court is whether the assessee association is a public charitable institution entitled to exemption under section 4(3)(i) of the Indian Income‑tax Act.
The assessee was incorporate as a company not for profit under section 26 of the Indian Companies Act, 1913. As the determination of the question depends upon the construction of its constitution it is necessary to set out the relevant clauses in its memorandum of association.
Clause 3.‑The objects of the association are to promote and develop home industries, arts and crafts, in the Presidency of `Bengal and to do all things necessary for the attainment of
(1) to collect and publish or otherwise furnish information with respect to home industries, arts or crafts, in Bengal ;
(2) to establish or assist home industries‑
(a) by the purchase of the raw materials and articles necessary for their manufacture, by advance of money or furnishing of guarantees to encourage such manufacture and the acquisi tion of craft secrets, rights or methods of work ;
(b) by promoting the formation of credit societies or other associations having for their object the extension or improve ment of the work or the condition of the workers in any home industry or the sale of its products ;
(3) to promote exhibitions, show‑rooms or other public dis plays of industrial work and the raising of funds from indivi duals, private or public bodies ;
(4) to purchase; sell or otherwise acquire or dispose of finished products, to act as agents for the supply of material ,or appliances or finished products in connection with any home industry.;
(5) to acquire by purchase, lease or otherwise, and hold land, buildings and property of every description deemed expedient for furthering the objects of the association, and also to build, erect and establish any buildings, factories or other structures deemed suitable for the said purposes, and to sell and dispose of such lands and property as may be deemed:
Clause 4.--The association shall not support with its funds or endeavour to impose on or procure the observance by its members or others of any regulations or restriction which if an object of the association would make it a trading concern.
Clause 5.-‑The income, profit and property of the association, whensoever derived, shall be applied solely toward the promotion and carrying out of the objects of the association as set forth in its memorandum of association, and no portion thereof shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise, howsoever by way of profit to the members of the association
Provided that nothing herein contained shall prevent the repayment of loans and deposits and other liabilities incurred in the interest of the association nor the payment in good faith of remuneration to any person in return for, or recognition of, any service to or benefit conferred on the association.
Clause 6.‑No member of any executive or working committee of the association shall be appointed to any salaried office of the association or any office of the association paid by fees, and no remuneration shall be given by the association to any member of such committee except repayment of out‑of‑pocket expenses and interest on money lent or rent for premises demised to the association. But this provision shall not apply to payments to any other company or association of which a member of the said two committees may also be a member for work done by such other company or association.
Clause 7.‑The fifth and sixth paragraphs of this memorandum are conditions on which the registration of the association has been obtained under the provisions of section 26 of the Indian Companies Act (VII of 1913).
Clause 8.‑Any person interested in the objects and aims of the association is eligible for membership.
Clause 9.‑The association shall consist of (a) ordinary members, (b) life-members and (c) patrons.
An ordinary member shall subscribe to the funds of the association Rs. 10 per annum.
A contribution of Rs. 150 or more shall entitle the contributor to life‑ membership and shall exempt him or her from any further annual subscription.
A contribution of Rs. 5,000 or more shall make the contributor a patron of the association and shall exempt aim or her from any further annual subscription.
Clause 12.‑If upon the winding up or dissolution of the association there remains after satisfaction of all its debts and liabilities any property whatsoever, the same shall not be paid or distributed amongst the members of the association, but if and so far as effect can be given to the next provision shall be given or transferred to some other institution or institutions having objects similar to the objects of this association to be determined by the members of the association at or before the time of dissolution, and in default thereof, by the High Court in Beng.
The association had a set of articles of association to which no particular reference was made except to Articles 7 and 16 noted below:
Article 7.‑No person shall be admitted a member of the association in any class unless he is first approved by the executive committee, and the executive committee shall have full discretion as to the admission of any person to membership in any class.
Article 16.‑Members shall be entitled to vote at all general meetings, to free admission to all exhibitions, libraries and meetings of the association, and to acquire publications of the association, at such reduced rates as the executive committee may, from time to time, determine.
From 1917, when it was founded, down to 1951, the association had always been exempted from payment of Income-tax. Proceedings were then started under section 34 of the Act and the Income‑tax Officer made an assessment order on August 30, 1951, for the assessment year 1942‑43 on an income of Rs. 14,296. Further orders were made for the years of assessment 1943‑44 and 1944‑45. The Appellate Assistant Commissioner set aside these assessment orders. This was upheld on a further appeal to the Tribunal by the revenue authorities. The Tribunal upheld the finding of the Appellate Assistant Commissioner. The present reference is at the instance of the revenue.
Section 4(3), as it stood at the relevant time, provided as follows:
"Any income, profits or gains falling within the following classes shall not 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 ;
(ia) any income derived from business carried on behalf of a religious or charitable institution when the income is applied solely to the purposes of the institution and‑
(a) the business is carried on in the course of the carrying out of a primary purpose of the institution, or
(b) the work in connection with the business is mainly carried on by beneficiaries of the institution."
"Charitable purpose" in the above section has its own meaning and "includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility."
The Income‑tax Officer found that the assessee's purposes were clearly not for relief of the poor, education or medical relief and the assessee's purpose could not be said to be one of general public utility since it was primarily intended to benefit a section of the public, i.e., those who were engaged in home industries in Bengal. According to the Income‑tax Officer the persons engaged in home industries in Bengal were a fluctuating body of private individuals and as such any benefit to this class could not be treated as charitable. The Appellate Assistant Commissioner however recorded that "from the examination of the object set forth in the memorandum of association as well as from the activities of this body it is clear that the association is meant for promoting the home industries, arts and crafts, in Bengal and helping poor craftsmen and destitute women of Bengal. The association makes advances to the poor craftsmen, weavers, destitute women and others, without interest in order to enable them to purchase raw materials, and takes back decorations and finished hand‑made products from them. These are sold to the public and the sale proceeds are utilised for the furtherance of the object of the association . . . The real underlying object is to benefit the poor craftsmen and destitute women by providing them with easily available advances for purchase of raw materials and giving them remuneration for crafts‑works. There is thus a good ground for holding that the purposes of the appellant association also included the advancement of general public utility."
This aspect of the activities of the association is not, however, dealt with in the order of the Tribunal. According to the Tribunal though the objects clause was not happily drafted (worded), it brought out sufficiently the purposes for which the association was formed, viz., to promote or develop home industries, arts and crafts, in the Presidency of Bengal. To achieve that object the association had been empowered to collect or publish or otherwise furnish information with regard to these industries and crafts and to do many other things ; but all these activities were only meant to achieve the main object. Purchase and sale of the finished products was not an end in itself but only a means to promote and develop home industries, arts and crafts. The Tribunal found that the object of the assessee was not to benefit individuals but all those who were interested in home industries, arts and crafts, in the Presidency of Bengal. Thus the beneficiary was the general public and the object could be said to be one of general public utility. The Tribunal held that the case was covered by the decision in All India Spinners' Association v. Commissioner of Income‑tax ((1944) 12 I T R 482).
Before us it was strenuously contended on behalf of the revenue that the association could not be said to have general public utility as one of its purposes. It was urged that the constitution of the assessee showed that it was formed for improving the lot of a trading community, that the promotion of industries, arts and crafts could not be a charitable object and if benefit to a particular community was one of the objects of the association its main purpose could not be held to be charitable. Lastly, it was urged that helping people concerned in ordinary trade was not an object of general public utility.
Here, as in many other branches of the Income‑tax law, there is notable divergence between statutory provisions in England and in India and hence English decisions, however illuminating they may be, have to be applied with caution. Under the English Income‑tax Act of 1842, allowances were to be granted on the rents and profits of lands, tenements, etc., belonging to any hospital, public school or alms house, etc., vested in the trustees for charitable purposes so far as the same were applied to such purposes. There was no definition of "charitable purpose" in the act and to fin out the meaning of the word "charity", "charitable uses", "charitable trust" and "charitable purpose", judges had to refer to decisions of the Court of Chancery. In his celebrated judgment in The Commis sioners for Special Purposes of the Income‑tax v. Pemsel ((1891) A C 531), Lord Macnaghten came to the conclusion "that the expression `trust for charitable purposes' in the Act of 1842, and the other expressions in the Act in which the word charitable' occurs, must be construed in their technical meaning according to English law". His Lordship discussed the foundation of the jurisdiction of the Court over a class of trusts known as "charitable trusts", the Statute of Elizabeth, the Statute of Mortmain and said "charity in its legal sense comprises four principal divisions ; trusts for the relief of poverty, trusts for the advancement of education ; trusts for the advancement of religion and trusts for other purposes beneficial to the community, not falling under any of the preceding heads". With regard to the last class his Lordship said, that "they were not the less charitable in the eye of the law, because incidentally they benefit the rich as well as the poor, as indeed, every charity that deserves the name must do either directly or indirectly".
The difference between "charitable purpose" under the Indian statute and "charity" as known to lawyers in England will at once be noted. The counterpart of the English doctrine "all purposes beneficial to the community" is replaced in the Indian Act by the expression "advancement of any other object of general public utility". It is the difference in the wording of this last portion of the definition coupled with the meaning attached to "charity" in various English statutes which has caused a divergence in the stream which follows the same course up to a certain point. Otherwise, there is a strong resemblance between "charitable purpose" as known to Indian Income‑tax law and "charity' as known to English lawyers. Further, under the Indian Act, even if property be not held fonder a "trust" as known to lawyers but on a legit obligation bearing close resemblance to a trust exemption would be attracted.
To find out whether exemption under section 4(3) can be had, one must ascertain in the case of property held under a trust of legal obligation, whether the income is applied for religious or charitable purposes and where a religious or charitable institution derives income from business, whether the business is carried on in furtherance of the institution or whether the work in connection with a business is pursued by beneficiaries of the institution. When the institution itself is the assessee, its object is the touchstone to test its purpose. The law on this point is settled so far as India is concerned by two decisions of the Judicial Committee of the Privy Council. These are the cases of All India Spinner's Association already referred to and the case of In re : The Trustees of the Tribune ((1939) 7 I T R 415). In the case of the Tribune Press the Judicial Committee observed that "under the Indian Income‑tax Act, the test of general public utility is applicable not only to trusts in the English sense but is to be applied to property held under trust or other legal obligation" and "to pronounce whether, any particular object of a bounty falls within the definition the Courts must in general apply the standard of customary law and common opinion amongst the community to which the parties interested belong". Their Lordships further found that "by the terms of the trust it is not to be carried on for profit to any individual", and observed…
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