ORDER
Per Shri V. P. Elhence, Judicial Member – These two appeals filed by the assessee arise out of the orders dated 1-2-1982 of the learned Commissioner (Appeals).
2. The assessee is a company registered under section 25 of the Companies Act, 1956, as a charitable organisation. For the assessment years 1975-76 and 1976 in question, the assessee declared a total income of Rs. 1,400 and a total loss of Rs. 7,209, respectively. The gross receipts for these years were Rs. 28,502 and Rs. 35,442 which included incomes by way of weighbridge amounting to Rs. 26,331 and Rs. 33,644, rescpectively. Out of this, for the assessment year 1975-76, an amount of Rs. 16,101 was claimed to have been applied for charitable and religious purposes in India during the previous year and Rs. 11,000 were said to have been set apart for to charitable and religious purposes in India. The balance of Rs. 1,400 was offered for taxation by the assessee. The income and expenditure account for the assessment year 1975-76 showed an excess of income over expenditure to the tune of Rs. 11,176 after deducting income-tax paid at Rs. 8,002. The excess of income over expenditure was, therefore, Rs. 19,178. For the assessment year 1976-77 the excess of income over expenditure as per income and expenditure account was Rs. 19,552 (Rs. 19,000 having been set apart for to charitable and religious purposes in India). For the assessment years 1972-73 and 1973-74, the assessee had filed returns showing nil income and the receipts were claimed by the assessee to be exempt on the principle of mutuality. However, this contention was not accepted up to the stage of the Tribunal. The receipts from weighbridge were held to be not exempt. The interest income on fixed deposit was also taxed. For the assessment years in question, the assessee had claimed exemption on the ground that till then Surat Art Silk Cloth Mrs. Association [1980] 121 ITR 1 had not come. Therefore, it was claimed that the decision for the assessment 1972-73 and 1973-74 could not operate as res judicata against the assessee. It was claimed that the assessee was an institution established for charitable purposes as defined under section 2(15) of the Income-tax Act, 1962 (the Act). It was claimed that the case of the assessee was particularly covered under the expression advancement of any other object of general public utility not involving the carrying on of any activity for profit. Exemption was, therefore, claimed in respect of the income under section 11(1) of the Act. The assessee also claimed the benefit of section 11(1) (a) in respect of the accumulation set apart by the assessee as aforesaid for weighbridge. It was pointed out on behalf of the assessee before the ITO that the income from weighbridge was not out of any activity for profit but was from the use of its assets. However, the ITO held that the receipts from weighbridge represented income from activity for profit. The ITO held that section 11(1) does not distinguish between the activity for profit for advancement of charitable purposes or otherwise. The assessee had also claimed the benefit of section 11(2) (a) which applies to a case where the income of charitable institution is accumulated or set apart for to charitable or religious purposes. The income to accumulated or set apart if utilised for charitable and religious purposes in India during the previous year in which the income was derived would be exempt from tax provided the assessee exercise the option in writing before the expiry of the time allowed under sub-section (1) or sub-section (2) of section 139 of the act whether fixed originally or on extension, for furnishing the return of income. This is the combined result which flows from section 11(2) (a), read with rule 17 of the Income-tax Rules, 1962. The ITO held that no notice of option having been exercised had been given by the assessee. He noticed that for the assessment year 1975-76 such notice was given as late as 28-1-1978, whereas the same should have been given on or before 30-6-1975. No extension for filing of the return having been granted, the ITO rejected the assessees claim. He also held that the delay could not be condoned because he had no express power under the Act to condone such delay., Even otherwise, he held that the assessee had not been able to point out any cogent and solid reasons as to why the notices as required authority 11(2) (a) could not be given by the assessee within the time allowed. The ITO, therefore, held that the case of the assessee for claim of exemption fell authority 11(1) as well authority 11(2) (a). He relied upon the order dated 15-10-1975 of the Tribunal for the assessment years 1972-73 and 1973-74 and assessed the assessee in respect of the amounts of Rs. 19,178 and Rs. 19,552 for the assessment years in question as aforesaid.
3. The assessee being aggrieved, came up in appeals, before the Supreme Court (supra). The stand taken up on its behalf was :
(i) That the assessee-company had been constituted to promote and protect trade, commerce and industry in India and to act and stimulate development and trade and other allied services connected with the main objects, which were of general public utility and, therefore, the assessees income was exempt, and
(ii) That the mere fact that the assessee operated a weighbridge could not be considered to be an activity for profit disentitling it from getting the benefit of exemption under section 11(1).
The learned Commissioner (Appeals), on a perusal of the memorandum of association of the assessee-company, took the view that none of the objects entitled the assessee to run a weighbridge to earn income therefrom. The learned Commissioner (Appeals) observed that the assessee had not furnished any information about the other activities carried out by the assessee apart from running the weighbridge. He also noticed that at the time of the filing of the return for the assessment year 1976-77, the assessee had stated that its only source of income was from weighbridge installed for the benefit of members and for traders who paid for the services rendered to them through the auspices of the assessee. On the basis of these facts, the Commissioner (Appeals) drew the conclusion that the assessees case was one where pure and simple business activity was being carried on and that merely because there were a number welcome objective in the nature of objectives for charitable purposes, the a could not claim exemption under section 11. He, therefore, confirmed the order of the ITO. Since the Commissioner (Appeals) held that the assessee was not entitled to exemption under section 11(1), the question relating to the issue raised pertaining the applicability of section 11(2) were not decided.
4. The assessee being aggrieved, has come up in appeals before us. Shri P. Mehrotra, the learned counsel for the assessee firstly submitted that the matter could not have been decided in accordance with the earlier decision of the Tribunal which was rendered on a different basis under which the claim of the assessee for the assessment years in question was not based. He referred to clauses (2) and (8) of the memorandum of association and submitted that it was not necessary that any of the objects in the memorandum of association should have specifically referred to the running of the weighbridge and the obtaining of receipts therefrom. He submitted that the assessee was a charitable organisation which had no profit objective and that private profit motive was climinated. He also submitted that there was no finding of the ITO that there was a predominant profit motive. He reiterated the reliance placed on the decision of the Honble Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra). He submitted that the words not involving the carrying on of any activity for profit in section 2(15) qualified or governed only the last head of charitable purpose and not the earlier three heads. Elaborating on his submission, he pointed out that the assessee, in the course of carrying out its charitable purposes of promoting and protecting trade and commerce, had arranged a facility for traders for their being able to obtain authentic and recognised weighment and measurement certificates. He pointed out that for providing this facility, for smooth flow, promotion and protection of commerce and in the interests of the mercantile community within the area of the assessees operations in this behalf, the assessee-company was organising and arranging the necessary outfit for issuance of the authentic and recognised weighment and measurement certificates. He pointed out that this required the installation of weighbridge and the appointment of staff, etc., and expenditure had to be incurred by the assessee for being able to provide the above facility. He also pointed out that in order to work out the aforesaid and other purposes, it was necessary to adopt some mode or method of finding finance such as may be open to the assessee within the frame work of its constitution. He, therefore, submitted that the assessee was entitled to exemption under section 11(1). Reference was made by him the decision of the Honble Kerala High Court in CIT v. Cochin Chamber of Commerce and Industry [1973] 87 ITR 83 in support of his arguments. So far as assessees claim under section 11(2) (a) is concened, he pointed out that though the learned Commissioner (Appeals) had refrained from examining this claim, the claim may be gone into by us as it did not require any further material to be produced. He pointed out that assessment order of the ITO gave the impression as if the time limit for the exercise of option was specified in section 11(2) (a), whereas the fact was that no such time limit was prescribed under the said provision but only under rule 17. He pointed out that rule 17 was only directory and not mandatory. In this connection, he referred to the decision of the Honble Madras High Court in the case of M. Ct. Muthiah Chettiar Family Trust v. fourth ITO [1972] 86 ITR 282 in which it had been held that the words in the prescribed manner in section 11(2) (a) did not confer power on the rule-making authority to prescribe a time limit for making an for exemption under this section and therefor, paragraphs 2 and 4 in Form No. 10 issued in pursuance of rule 17 were ultra vires. He pointed out that there was no decision of any other High Court taking a contrary view and, therefore, the ITO was not right in not accepting the assessees claim under section 11(2) (a). He also referred to the decision of the Jammu and Kashmir High Court in CIT v. Shri Krishen Chand Charitable Trust [1976] 102 ITR 138. He also referred to the decision of the Honble Bombay High Court in the case of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589, for the proposition that the Tribunal should take notice of the aforesaid decisions holding the provision of rule 17 to be ultra vires. Lastly, he referred to the decision of the Honble Andhra Pradesh High Court in the case of CIT v. H. E. H. the Nizams Supplemental religious Endowment Trust 1979 Tax LR (NOC) 36 for the proposition that the payments on account of tax made in a particular year irrespective of the fact that they related to the previous years, were yet outgoings in the particular year and constituted expenditure incidental to the carrying out of the purpose of the trust and that such payments cold not be excluded from exemption and were, thus, to be excluded from the income of the assessee.
5. On the other hand, Shri K. K. Rai, the learned departmental representative placed strong reliance on the orders of the income-tax authorities. He pointed out that the income from, weighbridge did not come from the members of the assessee but also from non-members. According to him, it was the dominant purpose and the dominant activity which was being carried on for profit. Reliance was placed by him on the decision of the Honble Supreme Court in the case of Dharmaposhanam Co. v. CIT [1978] 114 ITR 463 for the proposition that the question whether a trust was for charitable purposes has to be determined with reference to all the objects for which the trust had been brought into existence and not merely with reference to the activity actually conducted by the assessee. So far as the assessees claim under section 11(2) (a) is concerned, he submitted that the question did not arise as the assessee was not entitled to the exemption under section 11(1). Referring to the decisions relied upon on behalf of the assessee, he submitted that rule 17 had not been held ultra vires by the Honble Allahabad High Court and, therefore, it was entitled to have its full play within the jurisdiction of that High Court. In reply, Shri Mehrotra submitted that the assessee was recognised for purposes of issuing weigh certificates from weighbridge and, therefore, it issued them. He also relied upon the assessment order for the assessment year 1978-79, wherein out of this surplus of Rs. 20,586 over expenditure, the assessee had spent Rs. 31,753 by way of capital expenditure on the construction of effluent tank which was considered as an of surplus of charitable purposes.
6. We have considered the rival submissions as also the decisions referred to above. A perusal of the earlier order of the Tribunal in the case of the assessee for the assessment years 1972-73 and 1973-74 shows that the grant of exemption in respect of the income of the assessee was considered from the point of view of the applicability of the principle of mutuality and not under section 2(15). We, therefore, uphold the assessees contention that the examination of the claim of the assessee of the assessee for the assessment years in question could not be excluded as the principles of res judicata would not be applicable.
7. Whether the purpose of a trust involves the carrying on of an activity for profit can be judged by seeing whether an activity for profit is actually carried on as an integral part of the purpose or as a matter of advancement of the purpose. It is not enough that an activity results in profit, but it must be the end to which the activity must be directed. Where an activity is not pervaded by the profit motive but is carried on primarily for serving the charitable purpose, it will not be right to describe it as an activity for profit. All that is needed is that the charitable purpose should not be submerged by the profit making motive, the latter should not masquerade under the guise of the former. It was accepted by the Honble Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) that whenever an activity is carried on which yields profit or there is no provision to the effect that such activity shall be carried on no profit no loss basis, the inference cannot be drawn in the absence of some indication to the contrary that the activity is for profit or that the charitable purpose involves the carrying on of any activity for profit. It was also held that if the primary and the dominant purpose of the trust is of charitable nature which by itself may not be chartiable but merely ancillary or incidental to the primary object it would not prevent the trust from being a valid charity. The decision of the Kerala High Court in the case of Cochin Chamber of Commerce & Industry (supra) was also referred to and approved by the Supreme Court in the aforesaid case. In the present case, the income-tax authorities have not disputed that the nature and the functions of the assessee were charitable. Some of the clauses from the memorandum of association can be reproduced below, namely :
“(2) to promote and protect the trade, commerce, industries, agriculture and manufacture of India in which Indians are engaged or interested, directly or indirectly, and to represent and express on these and connected questions the opinion of Indians and Indian mercantile community of the United Provinces.
(3) to stimulate the development of trade, commerce, industry, manufactures and agriculture in India with Capital raised in India and specially to help such trades and industries as are wholly or mainly under the control and management of Indians.
(5) to organise associated activities for the furtherance of any of the aforementioned objects.
(24) To further Indian enterprise by promoting, organising, supporting, establishing, singly or jointly with other or individuals show rooms, exhibitions, museums, test houses, laboratories and bureaus.
(26) To look after the interests and well being of Indian consumers, primary producers and labourers, subject however to the safeguarding of the legitimate interest of trade industry and commerce.
(29) to purchase, take on lease or in exchange, hire or otherwise acquire any lands, properties, movable or immovable which the Chamber may from time to time deem necessary for its purposes and to buy all articles and things which may from time to time be required by the Chamber and to pay for the same in cash or otherwise as may be deemed expedient.”
Clause (IV) of the said memorandum of association provides that the income and property of the Chamber whensoever derived shall be applied solely towards the promotion of the objects of the Chamber 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 howsoever by way of profit to the members of the Chamber provided that nothing therein shall prevent the payment in good faith of remuneration to any officers or servants of the Chamber or to any member of the Chamber or other person in return for any services actually rendered to the Chamber. Clause (V) provides that the fourth paragraph of the memorandum is a condition on which a licence is granted by the Local Government of the United Provinces of Agra and Oudh to the Chamber in pursuance of section 26 of the Indian Companies Act, 1913. The assessee is right in pointing out that private profit motive is climinated from the various clauses of the memorandum of association nor there is any material or finding of the income-tax authorities regarding the existence of dominant profit motive. The case of the assessee has been that even though income is derived from the weighbridge and the receipts for the Commissioner years in question were mainly from the weighbridge and assuming that the income was derived in this respect not only from the members of the assessee but also from outsiders, there is no material on the record to show that the said income was derived with a profit motive. In order to carry out the charitable purposes of the assessee, it had to have some funds at its disposal and also some source from which those funds could be derived. The weighbridge is such a source. Therefore, the weighbridge apart from its not being prohibited under the objects of the assessee-company is directly relevant to and connected with the charitable objects of the assessee. In the case of Dharmaposhanam Co. (supra), the assessee was engaged in Chitties and money-lending business with the main object to do the needful for the promotion of charity, education, medical relief and other matters of public good and the question arose whether those objects fell under section 2(15) and its income from Chitties and money-lending business was exempt under section 11. It was held that since it was open to the assessee to apply its income from business to any of the objects and no definite part of the assessee income was related to charitable purposes, its income was held not to be exempt under section 11. However, in the present case, as we have seen above, clause (IV) clearly provides that the income and property whensoever derived had to be applied solely towards the promotion of the objects of the Chamber as setforth in the memorandum of association. Therefore, on facts, the decision in the case of Dharmaposhanam Co. (supra) could not adversely affect the assessees case. The fact that a portion of the receipts for the weighbridge come from non-members would also not affect the position. Having regard, therefore, to the decision of the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) as applicable to the facts of the present case, we are of the view that the assessee was entitled to the exemption under section 11(1).
8. so far as the assessees claim under section 11(2) (a) is concerned, it is clear from the decision of the Madras High Court in the cases of M. C. T. Trust (supra) and M. Ct. Muthiah Chettiar Family Trust (supra) that rule 17 was held ultra vires of section 11. In the absence of a contrary decision of any High Court, let alone the Honble Allahabad High Court (which would be binding on us) the assessee would be justified in submitting that its case should have been considered as if the prescription of the time limit under rule 17 was directory and not mandatory. In this connection, the decision of the Bombay High Court in the case of Smt. Godavaridevi Saraf (supra) also helps the assessee. Since the learned Commissioner (Appeals) did not consider the claim of the assessee under section 11(2) (a) on merits, we direct that the same be examined by him and decided after hearing the assessee.
9. The assessee is also right in placing reliance on the decision of the Andhra pradesh High Court in the case of H. E. H. the Nizams Supplemental Religious Endowment Trust (supra) for the proposition that the payments on account of tax made in the assessment years in question were entitled to be treated as expenditure incidental to the carrying out of the purposes of the assessee and that such payment could not be excluded from exemption and were, thus, to be excluded from the assessees income.
10. In the result, the appeals filed by the assessee are allowed.