1963-VIL-30-KAR-DT

Equivalent Citation: [1964] 52 ITR 126 (Mys)

MYSORE HIGH COURT

Income-Tax Referred Case No 10, 11, of 1961

Dated: 05.07.1963

COFFEE BOARD

Vs

DEPUTY COMMISSIONER OF AGRICULTURAL INCOME-TAX, MYSORE

S. G. Sundaraswamy, for the Appellant

D. M. Chandrasekhar (Assistant Advocate-General) for the Respondent

Bench

K. S. HEGDE and AHMED ALI KHAN, JJ.

JUDGMENT

The judgment of the court was delivered by

HEGDE J.--These are references under section 55(2) of the Mysore Agricultural Income-tax Act, 1957, to be hereinafter referred to as "the Act". In both these petitions, the assessee is the Coffee Board, a body incorporated under Central Act VII of 1942.

I.T.R.C. No. 10 of 1961 relates to the assessment year 1958-59 and I.T.R.C. No. 11 of 1961 relates to the assessment year 1959-60.

The questions of law referred for the opinion of this court are:

"1. Whether or not having regard to:

(a) the nature and constitution of the Board and its Research Department;

(b) the nature of the activity carried on by the Research Department in maintaining two research stations; and

(c) all other relevant factors, the Board derives 'income' liable to agricultural income-tax under the provisions of the Mysore Agricultural Income-tax Act?

2. Whether or not, the same derived by the Coffee Board from the farms maintained by the Research Department thereof, are exempt from liability to assessment of agricultural income-tax under section 12(f) of the Mysore Agricultural Income-tax Act?"

As we propose to answer the second question referred for our opinion in the affirmative and in favour of the assessee, it is unnecessary, as conceded by both the sides, to answer the first question.

The assessee is maintaining two research stations--one at Balehonnur in Chickmagalur District and another at Chattahalli in Coorg District. In these stations, coffee and other commercial crops are grown. The primary question for our decision is whether the income realised by the sale of the crops grown in these research stations is liable to be taxed under the Act.

Section 12(f) of the Act says that agricultural income-tax shall not be payable on that part of the total agricultural income of a person which is:

"Any sum derived from land held under a trust or other legal obligation wholly or partly for public purposes of a charitable or religious nature and actually spent for the said purposes."

There is an Explanation appended to that section and that Explanation reads:

"In this section, charitable purpose includes relief of the poor, education, medical relief and advancement of any other object of general public utility."

Before the assessee can claim relief under section 12(f) it must establish that these research stations are held by it under a trust or other legal obligation wholly or partly for public purposes of a charitable nature and the income derived from them are actually spent for the said purposes. In view of the explanation referred to earlier, advancement of any object of general public utility should also be considered as a public purpose of a charitable nature. Therefore, we have to first see whether the assessee is holding the two research stations either under a trust or other legal obligation wholly or partly for the advancement of any object and whether the income realised from those lands are actually spent for that purpose. To answer these questions, it is necessary to refer to the constitution of the Coffee Board, which shall hereinafter be referred to as the "Board". As mentioned earlier, the Board was created by an Act of the Central Legislature in the year 1942. The long title of the Act says that it is an Act:

"To provide for the development under the control of the Union of the coffee industry."

The Preamble to that Act says:

"Whereas it is expedient to provide for the development under the control of the Union of the coffee industry;

It is hereby enacted as follows:..."

Section 2 of the Act lays down:

"2. It is hereby declared that it is expedient in the public interest that the Union should take under its control the coffee industry."

Section 4 provides for the Constitution of the Board. The Board contains 33 members including the Chairman. Out of the 33 members two are elected by the House of the People, one is elected by the Council of States, the Chairman is appointed by the Central Government, and the remaining 29 members are nominated by the Central Government to represent the various interests mentioned in section 4(2)(c). In addition to this, any officer of the Central Government when deputed by the Government in that behalf has the right to attend meetings of the Board and take part in the proceedings thereof, but he has no right to vote. Section 10 provides that when the Board is dissolved for any reason, the unexpended balance of all money in the hands of the Board excepting money in the "pool fund" has to be disposed of in such manner as the Central Government may direct. The Central Government has also the right to disburse the money in the "pool fund" in the same manner as the Board would have done had it continued to exist. Section 11 provides for the levy of customs duties on all coffee produced in India and exported out of the country. Section 12 provides for the imposition of excise duty. Section 13(1) is an important section. We shall quote the same in full.

"13. (1) The proceeds of the duty of customs and of the duty of excise... levied under this Act (all of which shall form part of the Consolidated Fund of India), reduced by the cost of collection as determined by the Central Government, shall, if Parliament by appropriation made by law in this behalf so provides, be paid to the Board for being utilised for the purposes of this Act."

Now, we may go to section 42. This section provides for the general control of the Central Government over the Board. Under section 43 any person aggrieved by an order of the Board refusing a licence to or cancelling the licence of a curing establishment may, within sixty days of the making of the order, appeal to the Central Government.

The Board has two funds--one is called "General Fund" and the other is called "Pool Fund". These funds are constituted under section 30. The material portion of section 31(1) reads:

"31. (1) To the General Fund shall be credited--

(a) all amounts paid to the Board by the Central Government under sub-section (1) of section 13; and

(b) any sums transferred to the General Fund under the proviso to sub- section (2) of section 32; and

(c) all fees levied and collected by the Board under this Act."

Sub-section (2) says that the above fund shall be applied:

"(2)(a) to meet the expenses of the Board;

(b) to meet the cost of such measures as the Board may consider advisable to undertake for promoting agricultural and technological research in the interest of the coffee industry in India;..."

The rules framed under the Act provide for the appointment of a research committee to look after the research activities of the Board [see rule 18(1)(d)].

The functions of that committee are set out in rule 19(4)(c). This is how that rule reads:

"19. (4)(c) Research Committee.--Subject to such restrictions as may be imposed by the Board, the Research Committee shall discharge all the functions of the Board in regard to the promotion of agricultural and technological research in the interest of the coffee industry in India."

Rule 32 authorises the Board to make budget provision for research expenditure. Rule 33 provides for budget estimates. It reads thus:

"33. Budget estimates.--(1) The Board shall in each year prepare a budget for the General Fund for the ensuing financial year and shall submit it for the sanction of the Central Government on or before such date as may in this behalf be appointed by that Government... "

From the foregoing, it is clear that the Board is holding the two research stations mentioned earlier under a legal obligation for the purpose of advancing an object of general public utility. The income derived from those stations are credited to the "General Fund" which fund is actually spent wholly or partly for the public purposes as envisaged in section 12(f). Hence, the assessee is entitled to the exemption asked for. On behalf of the revenue it was not contended that the Board has no legal obligation to maintain these research stations. All that was urged on its behalf is that it is not an object of general public utility. It was said that these research stations merely benefit the coffee planters and none else; hence section 12(f) is inapplicable to the present case.

We feel constrained to say that the revenue has taken a very narrow view of the matter. Assuming, without deciding, that a section of the public does not come within the scope of the expression "general public" it is wrong to say that the knowledge gained from these research stations merely benefit the planters. It has a wider impact. The knowledge gathered in these stations is bound to improve the quantity and quality of our coffee crop and thereby give the general public, in the sense in which the revenue wants us to understand that expression, better and cheaper coffee. It is also likely to improve our foreign trade in coffee and thus add to our earnings from foreign trade. The scheme is intended to benefit the producer, the consumer and the country.

Section 12(f) is modelled on the basis of section 4(3)(i) of the Indian Income-tax Act of 1922, which section reads:

"4. (3) Any income, profits or gains falling within the following classes shall not be included in the 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..."

On a comparison of the two provisions it is clear that section 12(f) of the Act is wider in scope than section 4(3)(i) of the Indian Income-tax Act. The scope of section 4(3)(i) had come up for consideration in numerous cases. We may usefully refer to some of them. In In re The Trustees of the Tribune [1939] 7 I.T.R. 415 (P.C.) their Lordships of the Privy Council had to consider the scope of that provision. In that case, a trust was created in respect of income realised by the newspaper Tribune. The facts of that case are summarised in the head-note of that report. That summary reads as follows:

"A person who owned a press and a newspaper created a trust by his will by which his property in the stock and goodwill of the press and newspaper was made to vest permanently in a committee of certain members. It was the duty of the said committee of trustees under the will 'to maintain the said press and newspaper in an efficient condition, and to keep up the liberal policy of the said newspaper, devoting the surplus income of the said press and newspaper after defraying all current expenses in improving the said newspaper and placing it on a footing of permanency'. It was also provided by an arrangement made subsequently that in case the paper ceased to function or for any other reason the surplus of the income could not be applied to the object mentioned above, the same should be applied for the maintenance of a college which had been established out of the funds of another trust created by the same testator. There was a surplus income in the hands of the trustees after defraying the expenses of the press and the newspaper and on a reference by the Commissioner of Income-tax as to whether this income was liable to be assessed in the hands of the trustees, it was held by the Lahore High Court (per Young C.J. and Addison J. (Tek Chand J. dissenting) that the income in question was not income derived from property held under trust for charitable purposes as that expression is defined in section 4(3) of the Indian Income-tax Act...

On appeal to the Privy Council, held, reversing the judgment of the High Court:

(i) that the object of the settlor was to supply the province with an organ of educated public opinion and this was prima facie an object of general public utility. Though a trust for conducting a newspaper as a mere vehicle for the promotion of a particular political or fiscal opinion may not be within the exemption, where the object is to disseminate news and ventilate opinion on matters of public interest, the fact that the paper may have, or may acquire, a particular political complexion would not take away its exemption..."

Their Lordships further laid down:

"...that the question whether a particular object is of general public utility, like the question whether a particular trust is charitable, is a question of law, though it is doubtless for the Commissioner to find and state any facts bearing thereon..."

The decision of the Privy Council rested on the ground that the object of the trust was an object of general public utility. The learned counsel for the revenue attempted to distinguish this case on the ground that the trust was intended to disseminate education and that was a purpose mentioned in section 4(3)(i) of the Income-tax Act. There is some force in this contention. But the decision of the Judicial Committee rests on the wider ground, namely, that the object of the trust is of general public utility.

We may next refer to the decision of the Judicial Committee in All India Spinners' Association v. Commissioner of Income-tax [1944] 12 I.T.R. 482 (P.C.). Herein the Commissioner of Income-tax, Bombay, assessed to tax the income realised by the All India Spinners' Association, a registered association formed as a result of a resolution of the All India Congress Committee passed in 1925 for the purpose of the development of the village industry of hand-spinning and hand-weaving. The High Court affirmed the assessment levied by the taxing authorities. The Judicial Committee reversed the decision of the High Court holding that as the property of the association was held under a trust or at least under a legal obligation and as the primary object of the association was the relief of the poor and the other purposes of the association included the advancement of purposes of general public utility, the income of the association was exempt under section 4(3)(i) of the Act. In the course of its judgment, their Lordships observed that whether the advancement of the village industry of hand-spinning and hand-weaving is economically sound or not,--which according to their Lordships' view is a matter for the economist,--the fact that the association was founded for that purpose is itself a justification to hold that the purposes intended to be achieved through that organisation are purposes of general public utility. This decision, undoubtedly, lends support to the contentions advanced on behalf of the assessee.

Sri Sundaraswamy, the learned counsel for the assessee, next placed reliance on the decision of the Madras High Court in Andhra Chamber of Commerce v. Commissioner of Income-tax [1961] 42 I.T.R. 503. The assessee therein, the Andhra Chamber of Commerce, was a company which obtained registration under the provisions of section 26 of the Indian Companies Act, 1913. Its objects were to promote trade, commerce and industry in general and particularly in the Andhra region. Both section 26 of the Companies Act and the memorandum of the Chamber of Commerce required it to expend its income solely on the promotion of its objects and prohibited it from distributing any portion of its income amongst its members by way of dividend or otherwise. The memorandum further provided that even if the Chamber of Commerce were dissolved or wound up its assets should not be distributed amongst its members but should be transferred to other institutions with similar objects. The principal sources of its income were the subscriptions and donations it received from its members and the rent it received from the tenants who occupied its buildings. The income-tax authorities brought to tax the net income from its buildings under section 9 of the Income-tax Act. The assessee contended that the income was exempt from tax under section 4(3)(i). On a reference, the High Court held that the object of promoting trade, commerce and industry was an object of general public utility within the meaning of section 4(3)(i) of the Income- tax Act; it further held that neither the object of its individual members to benefit themselves nor the fact that they did derive such individual benefit from the activities of the assessee affected the determination of the question whether its object was one of general public utility. Further the fact that the assessee was under a legal obligation, under section 26 of the Companies Act as well as under its memorandum of association, to spend or accumulate its income for a public charitable purpose, which obligation the court could and would enforce when called upon to do so; that, therefore, the income of the assessee from property was exempt from taxation under section 4(3)(i) of the Income-tax Act. There is no doubt that this decision strongly supports the case of the assessee. The facts of that case are very similar to the facts of the present case.

Sri Sundaraswamy invited our attention to some of the decisions rendered by English courts in support of his contention that the income with which we are concerned in this case is exempt from taxation. Our attention was not invited to the relevant provisions in the English Income- tax Act. Hence we have not considered those decisions.

The learned counsel for the revenue, in his turn, placed reliance on certain decisions. The first case to which he invited our attention is the decision of the Bombay High Court in Commissioner of Income-tax v. Grain Merchants' Association of Bombay [1938] 6 I.T.R. 427. As per the memorandum of that association the income realised by that association was to be spent" as per the resolutions of the committee of the association passed from time to time on matters of commercial and other small as well as big works of public utility". The Bombay High Court held that the object of the association was not an object of general public utility within the meaning of section 4(3), as it was confined to a section of the public, i.e., those interested in commerce, and the income of the association was not exempt from tax under that clause. The judgment in that case is very brief. From the available facts it appears that the fund in question was entirely under the control of a committee of the Bombay Grain Merchants' Association and it could disperse that fund "on matters of commercial and other small as well as big works of public utility". That being so, it is not possible to say that the fund in question came within the scope of section 4(3) of the Income- tax Act.

The next decision to which our attention was invited was the decision of the Allahabad High Court in Chamber of Commerce, Hapur v. Commissioner of Income-tax.[1936] 4 I.T.R. 397. The assessee therein was an association incorporated under section 26 of the Companies Act, as an association limited by guarantee not existing for earning profits and prohibited under the law from declaring any dividends to its members. The question for decision was whether the income realised by that association can be held to be exempt under section 4(3)(i) of the Income-tax Act. Their Lordships held that, before an institution can be held to be "charitable" within the meaning of this Act, there must be an element of altruism; that is to say, the beneficiaries must not be able to claim the benefit. It was further held that where in a mutual concern institution its members and such outside members as may elect to do business through it are only benefited and it is doubtful whether an object of general public utility is being advanced by the institution; hence, it is not a "charitable" institution within the meaning of section 4, sub-section (3), clause (ii). The facts found in that case are: the chamber of commerce, a mutual concern, derived its income from its members only, in spite of certain fixed amount on each transaction registered in the chamber. The chamber had also direct dealings with creditors and that fact was mentioned in its memorandum of association. Such outsiders made certain payments to the chamber through its members. The income-tax authorities conceded that the payments were not income from "business" but sought to assess them. The court held that such payments could not appropriately fall under any other head than "business" and since they were not income from "business" as conceded by the income-tax authorities they were not taxable as income from other sources within the meaning of section 6(vi) of the Act. This case is clearly distinguishable. There the benefit went to a small group and not to the general public. Therefore, it is not necessary to consider whether the several propositions laid down in that decision are correct.

The learned counsel for the revenue next invited our attention to the decision of the King's Bench in Rex v. Special Commissioners of Income Tax [1925] 10 Tax Cas. 73. That decision turns on the language of the statute concerned therein.

For the reasons mentioned above, our answer to question No. 2 submitted for our opinion is in favour of the assessee. In that view we have not thought it necessary to answer question No. 1. The revenue to pay the costs of this reference. Advocate's fee Rs 100 (one set).

Question No. 2 answered in favour of the assessee.