Vildirect: IncomeTax-caselaws-1980-VIL-723-MAD-DT

1980-VIL-723-MAD-DT

Equivalent Citation: [1981] 127 ITR 730, 17 CTR 332, 5 TAXMANN 77

MADRAS HIGH COURT

Date: 03.01.1980

ADDITIONAL COMMISSIONER OF INCOME-TAX, MADRAS-I

AUTOMOBILE ASSOCIATION OF SOUTHERN INDIA

BENCH

Judge(s) : BALASUBRAMANIAN., SETHURAMAN

JUDGMENT

The judgment of the court was delivered by

SETHURAMAN J.-In this reference under s. 256(1) of the I.T. Act, the following questions have been referred for the opinion of this court :

" 1. Whether, on the facts and in the circumstances of the case, it has been rightly held that the object of the assessee fell within the definition of section 2(15) of the Act, and, therefore, the assessee was entitled to exemption under section 11 of the Income-tax Act, 1961 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no omission or failure on the part of the assessee by reason of it having declared its status as an 'association of persons' instead of 'company' and, therefore, reopening of the assessment made by the Income-tax Officer under section 147(a) of the Income-tax Act, 1961, was not justified ? "

The assessee is an association originally registered as " the South India Motor Union " on 24th July, 1911, under s. 26 of the Indian Companies Act, 1882. Its name was subsequently changed to " Automobile Association of Southern India, Madras ". The main objects of the association were as follows:

" To encourage and develop the automobile movements in the Madras Presidency, Hyderabad, Mysore, Travancore, Cochin and other Native States of Southern India, and, as far as possible, work in conjunction with other similar associations to watch, protect and extend the rights and privileges of its members and of automobiles generally; to encourage and facilitate motor-touring ; to supply to its members a centre of information and advice on matters pertaining to motor vehicles, and so far as may be practicable to afford them support in the protection and defence of their rights.

There are other objects set out in the memorandum of association, but they are either incidental to the main object or in the nature of powers. Clause 4 of the memorandum provides that the income and property of the association shall be applied solely towards the promotion of objects of the association, as set forth in the memorandum of association and that no portion thereof shall be paid, or transferred directly or indirectly by way of dividend, bonus or otherwise to the members. However, remuneration may be paid to any officers and servants of the association for services rendered, even though they may be members. There are various categories of members and the number of members is unlimited. Persons owning motor cycles and scooters are also eligible to become members. The subscription varies for the different classes of members and also with the type of vehicles possessed by the members.

The assessee claimed that the institution was a charitable institution eligible for exemption under s. 11 of the I.T. Act, 1961. This claim had been considered for the assessment year 1957-58, and rejected. For the assessment years now under consideration, viz., 1958-59, 1959-60, 1960-61 and 1969-70, the ITO applied the decision for the assessment year 1957-58, and rejected the assessee's claim for exemption for the assessment years 1958-59, 1959-60, 1960-61 and 1969-70.

The assessee took up the matter on appeal to the AAC. There were two points in the appeal before him. The assessment for the years 1958-59, 1959-60 and 1960-61 had been reopened under s. 147(a), because the assessee had originally given the status as " association of persons " instead of " company ". In the appeal before the AAC, the assessee's objection was that the provisions of s. 147(a) did not apply. The AAC was of the opinion that the assessee had placed before the ITO all the primary facts and that it could not be said that the mere declaration as an " association " would amount to an omission or failure on its part to disclose fully and truly all the material facts. He, therefore, accepted the assessee's objection to the invoking of s. 147(a). He went into the question whether the exemption under s. 11 applied to the assessee and he was of the opinion that it was not entitled to the exemption. In his view, the association was pursuing only the interests of its individual members, who were car owners.

The assessee preferred an appeal to the Tribunal contesting the finding of the AAC regarding the claim for exemption under s. 11. The ITO in his appeal contested the decision of the AAC regarding the applicability of s. 147(a) in so far as it related to the assessment years 1958-59, 1959-60 and 1960-61. The appeals were taken together for disposal by the Tribunal. In the course of its order, the Tribunal has referred to the activities of the association as follows:

" The providing of badges to members, supplying of periodical magazines to members, arrangement of payment of motor vehicle tax of members and supplying of road maps, all may constitute specific services to the members. But running of traffic school and mechanical school, participating in the activities of various bodies like Tamil Nadu State Road Development & Traffic & Planning Committee, Tamil Nadu Tourism Development Committee, Tamil Nadu State Transport Advisory Committee, Regional Tourist Committee for Southern Region, all these have a wider impact on the automobile movement. The object of the driving school and mechanical school is to see that driving in scientific and organised way is imparted to its members and the mechanical school, in turn, could also bring out persons with full confidence to deal with the mechanical problems. In our opinion, these two activities are not done with a view to be run in a commercial way, but to train persons in these respects with a view to see that proper motorists are made available. The participation of the assessee association with the various Committees referred to above is not with a view to voice the members' opinion alone but also to voice the automobile difficulties of the public. In fact, the various suggestions contributed to road safety by way of making check post barriers visible from a distance, erecting of 'No parking' boards perpendicular to the direction of the road, bringing traffic sign boards to equal height, prohibiting of jay-walkers in 'No Horn' zones, erecting big size speed limit boards in speed limit areas and also widening of Elphinstone Bridge (Adyar Bridge) cannot be said that all these are meant to be only advantageous to the members but these have been made in the interests of all motorists and even for other types of vehicular movement. "

It was further observed in the course of its order as follows:

" After going through ...... the reports of the general body meeting, we find that various activities which the association intended to serve or to render, would ultimately have a role to play in the attainment of the main object, namely, development and encouragement of the automobile movement. It may serve the motorists or its members but it also serves the other motorists, who are not members, and also other vehicles. In other words, it serves a cross section of the public. It is in that regard the decision of the Supreme Court in the case of CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722 (SC) has application to the facts of this case. Further, we find that the object, which in this case is general public utility, does not involve the carrying on of any activity for profit. The running of mechanical school, driving school and other services to members are not such involving the carrying on of any activity for profit. "

With regard to the reopening of the assessment for the assessment years 1958-59, 1959-60 and 1960-61, it was held that there was no omission or failure on the part of the assessee to disclose fully and truly all material facts and that the mere description of the status as an " association ", afforded no justification for reopening the assessment. It is on these facts that the questions already extracted above have been referred to this court.

We shall take up for consideration the second question regarding the applicability of s. 147(a). That provision would apply to a case where income had escaped assessment on account of the assessee's failure to disclose fully and truly all material facts relating to the assessment. It is not in dispute that the assessee had given all the particulars regarding the income. The assessee had described the status as " association of persons ". As the assessee was registered as a "company" under the Indian Companies Act, its real status was that of a " company" However, there is nothing to show that the material facts relating to the status were not made available to the income-tax authorities. The name of " Automobile Association of Southern India " was apparently responsible for the person concerned filling up the form with the status being described as " association ". The AAC has pointed out that the association was being assessed for the past several years from about the assessment year 1937-38. In the assessment for that year it was stated that the assessee was an association and registered under the Indian Companies Act and that it was, therefore, a company as defined in s. 2(6) of the 1922 Act. This status has been followed right through in all the subsequent assessment years up to the assessment year 1954-55. For the assessment year 1955-56, the status was mistakenly taken as " an Association of Persons " and this status was continued for the assessment year 1956-57, and also for the years under consideration. As all the primary facts are available to the ITO in his records, it is not possible to accept the submission that any income escaped assessment by application of a lower rate of tax, merely because the assessee has mistakenly described the status of the association as an " Association of Persons ". In the background of the fact that the assessee was taken to be an association in the earlier year, it cannot be stated that the proper rate of tax was not levied only because of the description of the status as an association. It is these aspects which have also been taken into account by the Tribunal. Having regard to the nature of the materials, which were already available to the department in the assessment records, we consider that the income cannot be said to have escaped assessment on account of the failure on the part of the assessee to place fully and truly all the material facts. Where the materials were already in the possession of the ITO and where he failed to draw any particular inference, it has been held that the income chargeable to tax for the relevant year cannot be said to have escaped assessment by reason of the omission or failure on the part of the assessee to disclose fully and truly all the material facts. In other words, in the present case, the failure to take the status as " company " was dereliction of duty on the part of the ITO consequent on his not referring to the earlier records in his possession. Where the facts are in the possession of the ITO and where he could have drawn proper inferences any failure on the part of the assessee, has not been held to attract s. 147(a). See Gemini Leather Stores v. ITO [1975] 100 ITR 1 (SC). It would, therefore, follow that the second question, which relates to the assessment years 1958-59, 1959-60 and 1960-61, has to be answered in favour of the assessee.

Even though in the above view, as far as those three years are concerned it would be unnecessary to go into the question of exemption under s. 11, still as the reference relates also to the assessment year 1969-70, wherein the question as to the applicability of s. 147(a) does not arise, the first question has to be considered, at any rate, for that year. In the assessment years the following are the items of income in respect of which the claim for exemption has been made:

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Assessment Profit on sale A.A.S.I. Map sales

year of badges charges

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Rs. Rs. Rs.

1958-1959 454 1,760 985 1959-1960 2,601 1,592* 1,344 1960-1961 3,902 2,406* ----- 1969-1970 10,552 (Gross) 23,960 (Gross)

*These charges are referred to as triptyque charges in some of the orders.

The AAC has analysed the receipts of the assessee from the assessment years 1957-58 to 1969-70. He found that the receipts by way of subscription and entrance fees left the assessee with some income after deducting all the expenditure. In some of the years there were deficits. For instance, in the assessment year 1958-59, there was an excess of expenditure over income or loss of Rs. 5,900 ; for 1959-60 and 1960-61, there were excess of income over expenditure of Rs. 1,700 and Rs. 1,000, respectively. Similarly, for the assessment year 1969-70, there was a surplus of income over expenditure of Rs. 2,700. He referred to the " free breakdown services " rendered to the members, and also, shipping, clearing and railing charges derived from the foreigners visiting India, who availed themselves of the services of the assessee. Services rendered to help the tourists was to help them go through the Customs in respect of vehicles that were brought over to India and give all assistance in respect of loading of the vehicles at the time when they were taken back and unloading of the vehicles at the time when they were received in India. With reference to all these activities, the Tribunal has found that they were not undertaken with the object of making any profit, Towards the close of the order the Tribunal has pointed out in para. 10, after referring to the AAC's estimate of the profits at 10% of the receipts, as follows:

"That itself would show that these charges are recovered not with view to make any profit but to maintain the services ...... In other words, these are not objects involving the carrying on of any activity for profit, as in our opinion, for carrying out the services to members, collections have been made for specific services towards reimbursement of the expenses."

In other words, the finding of the Tribunal was that the object of the assessee in recovering the charges from the members and others was not to make any profit, and the only attempt was to see that it did not run into any loss on this account. It is on these facts that we have to consider the claim for exemption under s. 11.

Though these cases were heard on November 20, 1979, and we reserved judgment on that day, it was brought to our notice that the Supreme Court had pronounced its judgment in similar matters and a newspaper's report to that effect was produced. Therefore, the matter was posted again for hearing on the 10th December, 1979, by which time we were able to get a copy of the judgment of the Supreme Court dated 19th November, 1979, in Tax Reference No. 1A of 1973 and Tax Reference Nos. 10 to 14 of 1975 in Addl. CIT v. Surat Art Silk Cloth Manufacturers' Association [1980] 121 ITR 1 (SC). That case was heard by a Bench consisting of five judges of the Supreme Court. A. P. Sen J. dissented from the majority opinion, which was in favour of the assessee getting the exemption. The main judgment for the majority was pronounced by Bhagwati J., with whom Untwalia and Tulzapurkar JJ. concurred. R. S. Pathak J. delivered a separate judgment, but it was in agreement with the majority view.

In that case, the assessee was a company incorporated under s. 25 of the Companies Act, 1956, and its object was to promote commerce and trade in art silk yarn, raw silk cotton yarn, art silk cloth, silk cloth and cotton cloth. The memorandum permitted the assessee to carry on all or any of the businesses of art silk yarn, etc., belonging to and on behalf of the members and to obtain import and export licences and to buy and sell and deal in all kinds of cloth belonging to and on behalf of the members. The income of the assessee was mainly derived from annual subscription at the rate of Rs. 3 per powerloom, and commission calculated on the basis of a certain percentage of the value of licences for the import of foreign yarn and quotas for purchase of indigenous yarn obtained by the assessee for its members. The assessee claimed that it was an institution established for a charitable purpose and that its income was, therefore, exempt from tax under s. 11. In dealing with this claim, the Supreme Court, after referring to the earlier decisions on the point, held that the assessee was eligible for exemption. The majority judgment may be summarised as follows:

(1) It is the object of general public utility which must not involve the carrying on of any activity for profit and not its advancement or attainment. What is inhibited is the carrying on of an activity for profit with the object of general public utility and not its linking with the accomplishment or carrying out of the object. It is not necessary that the accomplishment of the object or the means to carry out the object should not involve an activity for profit ;

(2) According to the contention of the revenue even if a business was held under trust by a charitable trust or institution for promotion of an object of general public utility, income from such business would not be exempt since the purpose would cease to be charitable. Such a construction, which rendered a provision of the Act, viz., section 11(4), superfluous and reduced it to silence, cannot be accepted ;

(3) The test which has to be applied is whether the predominant object of the activity involving any carrying on of an object of general public utility is to subserve the charitable purpose or to earn profit. Where profit-making is the predominant object of the activity, the purpose, though an object of general public utility, would cease to be a charitable object. But where the predominant activity is to carry out a charitable purpose and not to earn profit, it would not lose its character as charitable purpose merely because some profit arises from the activity;

(4) It is not at all necessary and there must be a provision in the constitution of the trust or institution that the activities should be carried on on "no profit no loss" basis or that profit should be prescribed. Even if there is no such express provision, the nature of the charitable purpose, the manner in which the activity for advancement of the charitable purpose is being carried on and the surrounding circumstances may clearly indicate that the activity is not impelled by a dominant profit motive. What is necessary to be considered is whether having regard to all the circumstances of the case the dominant object of the activity is profit-making or carrying on a charitable purpose. If it is the former, the purpose would not be a charitable purpose, but if it is the latter, the charitable character of the purpose would not be lost ;

(5) The question whether a trust is created or an institution is established for a charitable purpose falls to be determined by a reference to the real purpose of the trust or institution, and not by the circumstances that the income derived can be measured by standards usually applicable to a commercial activity. The quantum of the income is not a test in itself. It may be the result of an activity permissible under a truly charitable purpose, for profitable activity in working out the charitable purpose is not excluded; and

(6) Where a company was registered under section 25 of the Companies Act, 1956 (or its earlier counterpart), and under the memorandum of association the profit arising from any activity carried on by the assessee was liable to be applied solely and exclusively for the promotion of trade and commerce and no part of such profit could be distributed amongst the members in any form or under any guise, the assessee would be eligible for the exemption and the mere fact that the activity yielded profit did not affect the charitable character of the assessee."

It is in the light of these principles that the matter before us has to be considered.

We have already referred to the finding of the Tribunal that the object of the several activities undertaken by the assessee was not to make profit. Section 2(15) defines " Charitable purpose " as follows :

" 'Charitable purpose' includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility, not involving the carrying on of any activity for profit." (Emphasis added).

In Dharmadeepti v. CIT [1978] 114 ITR 454 (SC), the words " not involving the carrying on of any activity for profit " were considered as governing only the last head of the charitable purpose and not the earlier three heads and this construction is reaffirmed in the latest case. It would not be inappropriate to mention that this court had earlier placed the same interpretation on the provision in CIT v. Madras Stock Exchange Ltd. [1976] 105 ITR 546 (Mad), particularly the passage at p. 555. Even taking that in the present case the imparting of instructions for driving, etc., cannot be said to be an educational object, still it cannot be gainsaid that the assessee has been brought into existence in order to advance objects of general public utility. In these days of fatal accidents on roads accounting for a very large percentage of deaths, the utility of an association like this for the general public cannot be minimised. As pointed out by the Tribunal with reference to the specific instances, the suggestion made by the association contributed to road safety, so that the association served the needs of the society at large and not merely of the motorists. The case would, therefore, fall within the scope of the general principle enunciated in the decision of the Supreme Court in CIT v. Andhra Chamber of Commerce [1965] 55 ITR 722, which has been reaffirmed in the latest decision mentioned above. The assessee would, thus, be an association established for the advancement of objects of general public utility. As it has been found that the assessee did not carry on any activity for profit and as the profit motive is not the dominant object of the assessee-association, it has to follow that the assessee-association would fall within the scope of the exemption under s. 11.

The result is that the first question is answered in the affirmative and in favour of the assessee. Both the questions are answered accordingly. There will, however, be no order as to costs.

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