1961-VIL-95-KER-DT

Equivalent Citation: [1962] 45 ITR 478 (Ker)

KERALA HIGH COURT

Income-Tax Reference No 10 of 1960

Dated: 20.12.1961

DHARMODAYAM CO.

COMMISSIONER OF INCOME-TAX, KERALA

Bench

M. S. MENON C.J. (AG.) AND M. MADHAVAN NAIR, J.

STATEMENT OF CASE

By these applications which are consolidated, the assessee requires the Appellate Tribunal to refer to the High Court certain questions of law said to arise out of the Tribunal's consolidated order in I.T.A. Nos. 9040 to 9044 of 1958-59 dated 30th May, 1959. 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 and refer it to the High Court of Kerala at Ernakulam under section 66(1) of the Act.

2. The assessee is a company registered on 21st January, 1959, under section 22 of the Cochin Companies Act. The memorandum and articles are not printed and annexed hereto but the assessee undertakes to produce copies of the same at the time of hearing before their Lordships of the High Court.

3. The objects of the company as stated in clause 3 of the memorandum are:

(a) To raise funds by conducting kuries with the company as the foreman; receiving donations and subscriptions; and by such other means as the company deems fit.

(b) To do the needful for the promotion of charity, education and industry.

(c) For carrying on the business and activities of the company, for utilising the funds of the company profitably, and for the advancement of charity, education and industry in so far as is appropriate, to purchase, take on lease or for hire, to sell, to let on lease or for hire movable or immovable properties, to construct buildings, to purchase or assign shares, debentures, bonds and such other rights and securities and security bonds, to join in the kuries conducted by other institutions, to lend the company's funds and its kuri amounts on the security of immovable properties and movable properties such as kuri pass books, etc., to borrow for the requirements of the company on the security of the company's properties, to invest funds of the company in banks or securities, to accept as security for future subscriptions from prized subscribers movable or immovable properties, shares, bonds, debentures, etc. or specific or personal guarantee and accept and administer trust properties which are conducive to the furtherance of charity, education and industry with or without remuneration.

(d) To encourage others to form other institutions with the purpose of acting in accordance with the objects of the company.

(e) To do all such things as are conducive to the fulfilment of the above objects.

4. Article 3 of the articles of association recites:

All males, not below the age of 21 and belonging to the Roman Catholic Syrian Christian Community of Trichur town may become members of the company subject to the memorandum and articles of association of this company."

5. Article 25 recites that there will be four trustees.

6. Article 28 recites:

"The movable properties of the company shall be in the name of the trustees and all the monetary and property transactions and all the suits pertaining to the company shall be carried on in the names of the trustees."

7. Article 29 states that each trustee may be appointed at the general meeting for special supervision for a period of 3 months.

8. Article 36 states that the business of the company is to collect funds by conducting kuries, receiving donations and collecting subscriptions and by other means.

9. Article 39 recites that the profits of the company shall not be divided among the members. From the annual net profit from the working of the company 20% should be set apart towards reserve fund and 10% towards bad debts. The balance of profit after so setting apart towards funds may be utilised according to the directions of the general meeting, for the education, etc. of the Roman Catholic Syrians of Trichur town. But out of the said 70% amounts may be utilised for any public purpose according to the decision taken at the general meeting by a majority of not less than 80% of the members present. Under this article an obligation is cast on the directors of the company to apply 70% of the annual net profits for public purposes.

10. The assessee company carried on business in kuries. For the assessment years 1952-53 to 1956-57 (the previous years being the calendar years 1951 to 1955), in making its returns of income, the assessee did not show the income from the aforesaid business and claimed that the income was exempt under section 4(3)(i) of the Act; that the proviso to the section did not apply as the business was not carried " on behalf of (any) religious or charitable institution," referred to therein, but by the assessee itself.

11. For the purpose of a convenient reference, the relevant portion of the section with the proviso as amended by the Income-tax (Amendment Act, 1953), is reproduced below:

"4(3) Any income, profits or gains falling within the following classes shall not be included in total income of the person receiving them:

(i) Subject to the provisions of clause (c) of sub-section (1) of section 16, 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:

Provided that such income shall be included in the total income...

(b) in the case of income derived from business carried on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes of the institution and either--

(i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or

(ii) the work in connection with the business is mainly carried on by the beneficiaries of the institution."

12. The Income-tax Officer repelled the contention in the following words reproduced from his order:

"A preliminary objection was raised that the income of the company is not assessable to income-tax at all. It was argued that according to the memorandum and articles of association of the company, the Roman Catholic Syrian Christian Community of the Trichur town are its beneficiaries; that the business of the company is managed by the board of directors and trustees elected from the members who belong exclusively to that community, and that even the employees of the company except two belong to the said community. It was, therefore, contended that the business of the company is carried on by its beneficiaries and, therefore, it satisfies one of the conditions for exemption laid down under sub-clause (b) of section 4(3)(i). I do not find my way to accept this contention. First of all, I do not think it correct to say that the Roman Catholic Syrian Christians of the Trichur town are alone the beneficiaries of the institution, because the memorandum of the company does not confine its objects to any particular community. The object as mentioned in the memorandum of association is: 'to do the needful for the promotion of charity, education and industry'. It is rule 39 dealing with the application of profit that restricts the benefits to the Roman Catholic Syrian Christians of the Trichur town. There also the wording is 'can be used'. That rule provides that the benefits can be extended to any person outside the said community if 80% of the members present in the general body meeting so decide. Therefore, the entire humanity has to be considered as the beneficiaries of the company. If the view of the advocate is accepted, the provisions of the Act will become an absurdity because in that case, as every human being will be a beneficiary of every charitable institution not restricted to any particular sect or community all such institutions will get automatic exemption. Clearly this cannot be the intention of the legislature and I do not think that such an interpretation of the provisions of the Act is possible, viewed from their proper context. In my view under the constitution of the assessee company. a person becomes a beneficiary only when the general body of the company decides to confer some particular benefit on him. As the work in connection with the business of the company is not being carried on by such people, I would find that neither the business of the company is carried on in the course of the actual carrying out of a primary purpose of the institution, nor the work in connection with its business carried on mainly by the beneficiaries of the institution, Therefore, its income from business does not get the exemption contemplated under section 4(3)(1)".

13. On appeal to the Appellate Assistant Commissioner, it was contended that:

(a) the company is a public charitable trust, its properties are trust properties, investments whether in the shape of immovable property or movable property, investments on mortgages of landed property, investments in kuri kaipadas were all from savings, the investments of savings have the nature of trust and income therefrom is not liable for assessment under section 4(3)(i) of the Act.

(b) The income derived from business was applied wholly for the purposes of the institution in view of the provisions in the memorandum and articles of association, and the work in connection with the business was mainly carried on by the beneficiaries of the institution and, therefore, the business income is not liable for assessment under section 4(3)(i)(b).

These contentions were rejected by the Appellate Assistant Commissioner for the reasons mentioned in paragraphs 4 and 5 of his order, copy whereof is annexed hereto as annexure "A" and forms part of the case.

14. On a further appeal to the Tribunal it was contended as follows:

"The Appellate Assistant Commissioner has gone wrong in finding that the income cannot be wholly applied for the purpose of the charitable institution. The reasoning given for coming to such finding is not correct. Reserve funds and bad debt funds become trust property. The Appellate Assistant Commissioner has gone wrong in stating that in case of a winding up the reserve fund and other accumulations are to be distributed to the members of the company. The company itself being a trust, its savings are trust property and subject to the trust. The appropriate Government officers, who look after trusts, would take necessary steps to safeguard the trust. The High Court which is to pass orders in winding up would by its orders safeguard the trust and nothing out of the institution's properties movable and immovable would go out of the trust, nor would a member get anything out of the assets of the company.

The Appellate Assistant Commissioner should have found that the whole scheme of the company is based on its being a public company. The Appellate Assistant Commissioner should have decided thus.

The Appellate Assistant Commissioner should have found that the whole business of the company is carried on by the beneficiaries of the company. What the general meeting does is only determining individual beneficiaries from the general group of beneficiaries.

The Appellate Assistant Commissioner should have found that the exemptions provided by section 4(3)(i) and 4(3)(i)(b) of the Act would apply to the appellant company.

The Appellate Assistant Commissioner has gone wrong in holding that the investments are not of trust properties. The investments are of savings, not needed for the running of the business and the interest accumulating, automatically, become trust properties.

The Appellate Assistant Commissioner has gone wrong in finding that the inclusion of the commission in kuries in profits was proper."

15. For the reasons given in its consolidated order in all the appeals, copy whereof is annexed hereto as annexure "B" and forms part of the case, the Tribunal rejected the assessee's contentions and upheld the order of the departmental officers.

16. On the above facts, the question of law that arises is:

"Whether the income derived by the assessee trust from business in kuries is exempt from tax under the provisions of section 4(3)(i) of the Act as amended by Act 25 of 1953 for the five years 1952-53 to 1956-57?"

17. The departmental representative agrees to the statement. Learned counsel for the assessee, while agreeing that the facts are set out correctly, and that no material fact has been omitted herein, urges that all the questions proposed in his application except those numbered (i) and (ix) should be referred in the same form to the High Court. We are, however, of opinion that the question set forth above is comprehensive enough to cover all the questions proposed in the application for reference. We, therefore, decline to refer in the form in which they are stated in the application.

C. J. Antony and C. A. Ouseph, for the assessee

G. Rama Iyer, for the Commissioner

JUDGMENT

The judgment of the court was delivered by

M.S. MENON, Ag. C.J.--This is a reference by the Income-tax Appellate Tribunal, Madras Bench "A" under section 66(1) of the Indian Income-tax Act, 1922. The question referred is:

"Whether the income derived by the assessee trust from business in kuries is exempt from tax under the provisions of section 4(3)(i) of the Indian Income-tax Act, 1922, as amended by Act 25 of 1953 for the five years 1952-53 to 1956-57?"

The assessee is the Dharmodayam Company, Trichur, a company registered under the Cochin Companies Regulation. The licence granted to the company of January 21, 1919, under section 32 of that Regulation -the section corresponds to section 32 of the Companies Act, 1956--is in the following terms:

"Under section 32 of the Cochin Companies Regulation, the Diwan is pleased to direct that the company named 'The Dharmodayam Company, Trichur' which has for its objects the promotion of charity, education, industry, etc., and the doing of all such other things as are incidental or conducive to the attainment of the same, be registered with limited liability without the addition of the word limited to its name."

That the assessee is a trust is not disputed. The Income-tax Officer was also of the view that the trust was of a charitable character. He said:

"The company is a charitable institution and it is doing business of conducting kuries and advancing loans on interest."

There is no specific dissent by the Appellate Tribunal, and we think we will be justified in proceeding on the assumption that the Tribunal took the view that the assessee company was not only a trust but a charitable trust as well. If the company is a charitable trust, the only question that arises for consideration is whether the proviso to section 4(3)(i) of the Indian Income-tax Act, 1922, is attracted as contended by the department or not.

Section 4 deals with the application of the Act. Sub-section (3) thereof directs that any income, profits or gains falling within the classes specified therein shall not be included in the total income of the person receiving them. The class of income specified in clause (i) of sub- section (3) is:

"...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 exclusion is subject to clause (c) of sub-section (1) of section 16. We are not concerned with that provision.

The relevant portion of the proviso to clause (i) sub-section (3) of section 4 reads as follows:

"Provided that such income shall be included in the total income--

(b) in the case of income derived from business carried on behalf of a religious or charitable institution, unless the income is applied wholly for the purposes of the institution and either--

(i) the business is carried on in the course of the actual carrying out of a primary purpose of the institution, or

(ii) the work in connection with the business is mainly carried on by beneficiaries of the institution."

It is settled law that a business itself can be held under trust for religious or charitable purposes and that the income derived from such a business will fall within the ambit of the exclusion granted by clause (i) of sub-section (3) of section 4. The contention that we are called upon to decide is the contention of the department that such an income can be governed by the proviso as well and thus brought back into the net of taxation.

We negatived a similar contention in Commissioner of Income-tax v. Krishna Warriar* and we see no reason to differ from what we said in that decision. In that case, we quoted the following passage from Raghavachariar:

"If the business itself is held under trust for religious or charitable purpose, then income is to be considered as falling under section 4(3)(i). But if the business is not itself the subject of the trust, but the business is carried on by an institution which he held under a trust, but the business itself does not form part of trust, then section 4(3)(i)(b) will apply (Volume 1, page 254).",

and the following observation of Desai J. In Dharma Vijaya Agency v. Commissioner of Income-tax**:

"On a fair reading of clause (i), it must be held, in my judgment, that there is nothing in proviso (b) to clause (i) of section 4(3) which in any manner touches the case of a business which is held under trust for religious or charitable purposes. The income derived from such business is not to be included in the total income of the person receiving it.",

as embodying a correct statement of the law.

We are dealing with a case where the business itself is held under a trust for religious or charitable purposes; we are not dealing with a case where the business is conducted on behalf of the religious or charitable institution. This is abundantly clear from the memorandum of association. The first object of the company, as stated therein, is "to raise funds by conducting kuries with the company as the foreman; receiving donations and subscriptions; and by such other means as the company deems fit."

In the light of what is stated above we must hold that the proviso is not attracted and that the question referred has to be answered in the affirmative and in favour of the assessee. We do so.

A copy of this judgment under the seal of the High Court and the signature of the Registrar shall be forwarded to the Appellate Tribunal as required by sub-section (5) of section 66 of the Indian Income-tax Act, 1922.

Question answered in the affirmative.