1960-VIL-52-ALH-DT

Equivalent Citation: [1961] 41 ITR 472 (All)

ALLAHABAD HIGH COURT

I.T.Miscellaneous Case No 415 of 1952

Dated: 23.09.1960

AGRA BULLION EXCHANGE LTD

COMMISSIONER OF INCOME-TAX

Judgment / Order

STATEMENT OF CASE

By these applications, which are consolidated for the sake of convenience, the Agra Bullion Exchange Ltd., hereinafter referred to as the assessee company, requires the Appellate Tribunal to refer to the High Court one question of law, which is said to arise out of the Tribunal's consolidated order in I.T.A. Nos. 4201 and 4975 Of 1949-50. Inasmuch as, in our opinion, a question of law does arise out of the aforesaid order, we hereby draw up a statement of the case to which the parties agree and refer it to the High Court of judicature at Allahabad under section 66(1) of the Indian Income-tax Act, 1922.

2. The assessee company was incorporated on April 5, 1946. Its memorandum and articles of association form part of the case. They are, however, not printed in order to reduce the cost of printing. The assessee company is directed to produce copies thereof at the hearing of the reference by the High Court. One of the objects for which the assessee company was incorporated was to contribute for charitable and other public purposes out of the profits of the company. We have underlined the words " out of the profits of the company ".

3. For the assessment year 1948-49 (previous year financial year 1947-48), the assessee company's income was computed by the Income- tax Officer at Rs 56,209, including a sum of Rs 26,903 said to have been received by the assessee company for the purposes of charity. A copy of the Income?tax? Officer's order is annexure " A " and forms part of the case. The balance sheet and profit and loss account for the year ended March 31, 1948, form part of the case. They are not printed in order to reduce the cost of printing. The assessee company is, however, directed to produce the copies thereof at the hearing of the reference by the High Court. It will be noticed that the assessee company in its profit and loss account did not include the money said to have been received by it for the purposes of charity. it will also be noticed that in the balance sheet there is a foot-note to the effect that Rs 42,000 stand deposited in fixed deposit with banks in respect of the Agra Bullion Charitable Eye Hospital Trust, out of charity contributions made by trading members as per decision of the directors,

4. For the assessment year 1949-50, the assessee company's income was computed at Rs 10,652, including a sum of Rs 6,040 said to have been received on account of charity. A copy of the Income?tax Officer's order is not made part of the statement of case, as it does not throw any particular light on the facts relevant to the question of law which is being referred to the High Court.

5. The board of directors of the assessee company framed certain rules and regulations. They have been printed in Hindi. They will be produced before the High Court by the assessee if so required by their Lordships. By rule 49, it was provided as follows:

"On transactions of gold and silver, the following charges of the exchange will be made:

Commission	0	4	0
Dalah	0	15	0
Dharmada (charity)	0	1	0

i. e., the total charges to be recovered will be Rs 1-4-0 per Parcha on purchase and sale. Out of the money credited on account of charity, I/4th will be spent on miscellaneous items and the balance of 3/4th will be kept in reserve according to the resolution of the board and will be spent in the discretion of the board."

This rule was subsequently amended, in so far as commission and brokerage are concerned. The charity charge, however, remained the same.

6. The assessee company has a trading hall, where licensed traders (trading members) do business through licensed brokers. The traders pay to the assessee company whatever amount is due from them on account of commission, brokerage and charity. They also pay in addition "differences", if any, they are liable to pay. In fact, the assessee company acts as a clearing house. The brokerage received by the assesse company is passed on to the brokers through whom transactions were effected.

7. It was contended before the Income-tax Officer that the money received by the assessee company on account of charity was not liable to tax. The Income-tax Officer not having accepted the assessee company's contention, the latter appealed to the Appellate Assistant Commissioner without any success. A copy of the Appellate Assistant Commissioner's order is annexure " B " and forms part of the case. The assessee company thereupon appealed to the Appellate Tribunal. The appeals were heard by Messrs. Dalal (Accountant Member) and Samarth (judicial Member). The Accountant Member was of opinion that the sum received on account of charity was not liable to tax whereas the judicial Member was of a contrary opinion. The matter, was then referred to the President under section 5A(7) of the Indian Income-tax Act. The President heard the case and he agreed with the judicial Member. A copy of the Tribunal's order is annexure " C and forms part of the case.

8. It will be noticed that the attempt made by the assessee company, claiming exemption under section 4(3)(1) of the Act, was given up before the President and also the attempt made on the basis of a certain paragraph in the Income-tax Manual.

9. The question at issue was whether the sums received by the assessee company on account of charity in accordance with rule 49 was its income, and this question was answered in the affirmative by the Tribunal.

10. The question of law that, therefore, arises is

" Whether, in the circumstances of the case, the sums of Rs 26,903 and Rs 6,040 were the assessee company's income liable to tax ?"

R. S. Pathak, for the assessee

Gopal Behari, for the Commissioner

JUDGMENT

The judgment of the court was delivered by

UPADHYA, J.?The question referred for the opinion of this court is

"Whether in the circumstances of the case the sums of Rs 26,903 and Rs 6,040 were the assessee company's income liable to tax ?"

The assessee is a company incorporated in 1946 and appears to have been formed specifically with a view to bring together mercbants dealing in gold and silver in Agra. One of the objects of the company, as mentioned in its memorandum of association, which has received notice by the Income?tax Appellate Tribunal is:

" To contribute for charitable and other purposes out of the profits of the company."

The assessee company maintains a trading hall where licensed traders (trading members) do business in bullion through licensed brokers. As stated by the Tribunal in the statement of the case the traders pay to the assessee company whatever amount is due from them on account of (i) commission, (:2) brokerage, (3) charity and (4) differences. The assessee company has certain rules which are printed and are known to all the members who agree to use the trading hall of the company for their business. Rule 49 provides as follows :

" On transactions of gold and silver, the following charges of the exchange will be made:

Commission... ... ... 0 4 0 Dalah... ... 0 15 0 Dharmada (charity)... ... 0 1 0

i. e., the total charges to be recovered will be Rs 1?4?0 per Parcha on purchase and sale. Out of the money credited on account of charity I14th will be spent on miscellaneous items and the balance of 3/4th will be kept in reserve according to the resolution of the board and will be spent in the discretion of the board."

In the statement of the case the Tribunal says " In fact the assessee company acts as a clearing house." " The brokerage received by the assessee company is passed on to the' brokers through whom transactions were effected.?

Among other facts, the Tribunal has stated the following :

(i) For the assessment year. 1948?49 the assessee company's income was computed by the Income tax Officer at Rs 56,209 including a sum of Rs 26,903 said to have been received by the assessee company for the purposes of charity. (2) The assessee company in its profit and loss account did not include the money said to have been received by it for the purposes of charity. (3) In the balance sheet there is a footnote to the effect that Rs 42,000 stand deposited in fixed deposit with banks in respect of the Agra Bullion Charitable Eye Hospital Trust out of charity contributions made by trading members as per decision of the directors. (4) For the assessment year 1949?50, the assessee company's income was computed at Rs. io,652 including a sum of Rs 6,040 said to have been received on account of charity. (5) The assessee company has a trading hall where licensed traders (trading members) do business through licensed brokers.

In fact the assessee company acts as a clearing house. The orders of the Income tax Officer and the Appellate Assistant Commissioner have been appended to the statement of the case and made part of it. The Income tax Officer subjected to tax the amounts received for charity from the ?trading members. On appeal the tax was upheld by the Appellate Assistant Commissioner. When a second appeal was preferred to the Income tax Appellate Tribunal, Mr. Dalal, the Accountant Member, took the view that the amount received for charity was not the income of the assessee at all. The amount paid ?by the trading members included commission, which was paid to the assessee company as its own commission, brokerage which was paid to the assessee company for being passed on to brokers through whom the trading members had transacted business and differences which had to be passed on to persons with whom the transactions had been entered into and who were entitled to the amounts. Similarly, amounts paid for charity were intended to be spent on charitable objects according to the rules of the company. The amount so paid for charity was not a part of the company's remuneration. Nor was it intended to be paid to the company itself The Accountant Member, therefore, held that the amounts in question could not be included in the total income of the assessee.

It appears that the assessee had put up an alternative case that even if the amounts collected for charity be considered to be the assessee's income, it was exempt under section 4(3)(i) of the Income- tax Act. The judicial Member took the view that the amount was not income derived from any property held under trust for' charitable purposes or other legal obligation, and did not fall within the purview of section 4(3)(i) of the Act. He, therefore, was of opinion that the tax should be upheld. On the difference between the two members the matter was referred to the President of the Tribunal who agreed with the Judicial Member and the tax was upheld. The assessee thereupon applied for a reference being made to this court and the question mentioned above has been referred for the opinion of this court.

From the facts of the case as stated, and as contained in the various orders appended to the statement of the case, it is clear that the amounts paid by the trading members to the company were not all meant for the company itself. The assessee company was entitled to retain for itself only the commission which was paid at the rate of four annas per barcha. The brokerage charges had to be passed on to the brokers through whom the transactions were entered into. The amount of "difference" money paid had similarly to be passed on to the trading parties entitled thereto. . It is not even suggested that any part of the brokerage charges or " difference money " could be retained by the assessee company for itself. These amounts have not been treated as income of the company by the income tax authorities. The only other amount received by the assessee company was for charity at the rate of one anna per barcha. This amount had to be spent according to the rules of the company and the resolution of the board relating to their expenditure. As is evident from rule 49 quoted above one fourth of this amount could be spent on miscellaneous items of charity but three fourths bad to be spent in accordance with the resolution of the board.

Learned counsel for the Department has conceded that substantial amounts have been spent on the eye hospital run by the assessee. It is not suggested that any part of the collections made for charity have been appropriated by the assessee company for its own use. Learned counsel for the Department, however, contended that if the money received for charity was not spent away on charitable purposes forthwith and formed part of the balance in hand the use of that money was available to the assessee company. This argument appears to overlook the fact that the question is not whether the assessee company was in a position to use temporarily some amount received for charity, but whether the amount when received was the income of the assessee company or was an amount received in trust for charitable purposes. From the facts mentioned above and embodied in the various orders appended to the statement sent by the Tribunal it is clear that the amount so received by the assessee company was not its income at all and it had no right to appropriate to its own use any amount collected by it under the rules framed by the trading members as charity. From the accounts of the company and the balance sheet the Tribunal found that the collections made on account of charity were not treated by the company as its own money.

It appears that some confusion did arise before the income-tax authorities and the Appellate Tribunal because of the claim made on behalf of the assessee for an exemption under section 4(3)(i) of the Income-tax Act.

Section 4 lays down that subject to the provisions of this Act the total income of any previous year of any person includes all income, profits and gains from whatever source derived which are received or are deemed to be received in the taxable territories and in certain cases outside the taxable territories. Sub-section (3) lays down that any income, profits or gains falling within the classes mentioned thereunder shall not be included in the total income of the person receiving them. Among such classes of income is mentioned any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes in so far as such income is applied or accumulated for application to such religious or charitable purposes as relate to anything done within the taxable territories and in the case of property so held in part only for such purposes the income applied or finally set apart for application thereto. The proviso deals with certain exceptions to this general rule with which we are not concerned in the instant case. This rule would apply to cases where, but for this provision, the amount would be taxable as the income of an assessee. In the instant case it is evident that the amount was not received by the assessee as its income at all. The payment made at the rate of one anna per transaction by a trading member was not payment for the assessee but was definitely a payment for charity and was only entrusted to the assessee company for proper expenditure.

We were referred to a decision of this court in Chamber of Commerce, Hapur v. Commissioner of Income-tax*. That was a case where the Chamber of Commerce had claimed the exclusion from its total income of amounts spent on charity in accordance with one of its objects. The court held:

"That the assessee was not a charitable institution within the meaning of the Income-tax Act and was not exempt from tax as such on its income, so the assessee was not entitled to claim exemption in respect of any money which it might have elected to spend on charity."

The facts of that case are quite different from those of the case now before us and the answer given to the question referred in their case affords no guidance to us. Another case to which we have been referred by learned counsel for the Department is Commissioner of Income-tax v. Vyas and Dhotiwala [1959] 35 I.T.R. 55, 58, 60. That was a case where the assessee, an association of persons, undertook to carry on the business of distributing cloth according to a scheme evolved by the Deputy Commissioner, Amraoti. One of the terms of the agreement provided:

"Profits resulting from the scheme shall be utilised for such charitable purposes as may be decided on by the deputy commissioner in consultation with the advisory committee appointed to supervise the scheme."

The Supreme Court held that on the facts stated the question was not whether income was received or was deemed to be received by the assessees but whether income had accrued to the assessees and the profits from the scheme formed the income of the assessees, and that the fact remained, that the working of the scheme produced profits which undoubtedly belonged to the assessees and since the assessees actually made the profits they were liable to be taxed thereon, whether they agreed not to make any profits or not; the fact that the deputy commissioner was completely in control of the scheme did not prevent the working of the scheme by the assessees from being a business carried on by them. The court further took the view that the business was not carried on on behalf of any religious or charitable institution and the profits of the scheme were, therefore, not exempt from tax under section 4(3)(ia). Sarkar, J., in delivering the judgment of the court observed:

"The provision that the profits would be devoted to charity to be decided by the deputy commissioner would indicate that without it the profits would have been utilisable by the assessees. The profits belonged to the assessees and hence the necessity for this agreement so that the assessees might be made to spend them on charity."

From the above it is evident that in the case before the Supreme Court what was claimed to be exempted were the profits of the assessees. The working of the scheme resulted in profits to the assessees and merely because the assessees were under the agreement obliged to spend it for charity did not take away from the fact that the profits had accrued to the assessees and were their income within the meaning of the law.

In the instant case the amount earmarked for charity by the trading members of the assessee company never accrued as an item of income to the assessee at all. The amounts were given for charity and the assessee company may be likened to a conduit pipe through whom the amounts passed. In his judgment the Accountant Member of the Appellate Tribunal has mentioned that the view taken by the income-tax authorities had compelled the assessee to discontinue collecting the amounts for charity. Learned counsel for the assessee also said that this was correct. This unfortunate result appears to be due to a misapprehension about the initial character of the receipts. It appears that among the objects of the assessee company is an object which empowers the company to spend its profits on charitable objects. This object is wholly irrelevant to the question that has been raised in this case. The amounts claimed to be exempted were not parts of the assessee's profits; nor does the company contend that the amounts cannot be taxed because they have been spent on charity by the assessee out of its own profits. As mentioned above, the dispute relates to the initial character of the receipt itself and is as to whether the amount paid by the trading members earmarked for charity was the assessee's income at all.

We are, therefore, of opinion that the question referred to this court should be answered in the negative and that the sums of Rs 26,903 and Rs 6,040 in question were not income of the assessee. The assessee is entitled to its costs which we assess at Rs 300. We fix the fee of learned counsel for the Department at the same amount.

Question answered in the negative.