CIT v. INDIA PEPPER AND SPICE TRADE ASSOCIATION — 1976 DIGILAW 111 (KER)

Judgment :- 1. These references relate to the assessment of M/s. India Pepper and Spice Trade Association, for the assessment years 1959-70,1970-71 and 971-72. The appeals before the Tribunal relating to the assessment for the above years were disposed of by a common order and it was found by the Tribunal that the assessee was entitled to exemption under S.11 of the Income-tax Act, 1961, for short the Act, in regard to certain disputed items of income. The view of the Tribunal was contended by the department to be erroneous in law and applications were made before the Tribunal for a reference to this Court and the Tribunal has stated a case and referred the following questions: 1. Whether on the facts and in the circumstances of the case, the Appellate Tribunal was justified in law in holding that the income of the assessee is exempt under S.11 of the Income-Tax Act 1961? 2. Whether on the facts and in the circumstances of the case, the Appellate Tribunal is justified in law in holding that the provisions of S.28 (iii) are not applicable to the facts of the case?" 2. The order of the Tribunal is Annexure D' and Para.6, 7 and 8 have dealt with the particular aspects which arose for consideration regarding the exemption claimed under S.11 of the Act. We shall extract those paragraphs: "6. Now it is necessary to see whether these objects satisfy the definition given in the Income-tax Act in S.2 (15). Where an object is a matter of general public utility, the object should not involve the carrying on of an activity for profit. We are of opinion that none of the objects involve perse any activity for profit. Certain activities carried on in furtherance of the objects of the Association had resulted in an excess of income over expenditure but that does not mean that the object itself involves the carrying on of an activity for profit. Thus, the Kerala High Court has pointed out in the case of C.I.T. v. Indian Chamber of Commerce 60 ITR 645 that in order to be disentitled from exemption, the object must involve the carrying of any activity for profit. The object must imply the carrying on of such activity. It is not sufficient if there is some activity carried on which results in profit. The object must imply the carrying on of such activity. It is not sufficient if there is some activity carried on which results in profit. There must be an activity in the form of business because the activity must be for profit and that activity for profit must be involved in the objects of general public utility. Even when an activity is in furtherance of the objects of a trust and even if such activity results in profits, the definition will not be attracted unless the objects involve such activity. The same ruling will apply to the assessee here. We, therefore, have to hold that the Appellate Asst. Commissioner was correct in his conclusion that the assessee is entitled to be considered as a charitable institution. 7. We will now consider the items which have led to the excess of income over expenditure. The first to be considered is the subscription which is payable by the members. The second item to be considered is laga which is collected under bye-law 207. As per this bye-law, a contribution at the rate of 50 paise per unit of 25 quintals of pepper shall be paid to the Association by the Seller as well as by the purchaser on all contracts. Now, this laga is being levied to enable the Association to carry on its activities. This is not in. the objects and it does not involve an activity for profit. The next item which has resulted in some income is interest from banks. This interest has arisen out of the time and call deposit in banks. Now, the rules of the Association require that the members deposit with them certain amount of the contract which they have entered for purchase or sale of pepper. These amounts instead of allowing to be idle are deposited with the bank for short durations. It has resulted in interest. This is merely incidental to holding the funds. 8 The next item is rent-from building owned by the Association. Another item is contributions from the brokers for licensing them. Some amounts are also received on sale of forms. These amounts instead of allowing to be idle are deposited with the bank for short durations. It has resulted in interest. This is merely incidental to holding the funds. 8 The next item is rent-from building owned by the Association. Another item is contributions from the brokers for licensing them. Some amounts are also received on sale of forms. These do not involve any activity for profits and on facts we do not find anything to disentitle the Association from Exemption." It is clear from what is stated in Para.6 of the order of the Tribunal that the Tribunal was very largely influenced by the decision of this Court in Commissioner of Income-tax, Kerala v. Indian Chamber of Commerce (1971) 80 ITR. 645). The view expressed by this Court in the above decision has been reiterated by this Court in Commissioner of Income-Tax, Kerala v. The Cochin Chamber of Commerce and Industry (1972 KLT. 435). What has been stated in these two decisions can briefly be summarised in this manner: The words occurring in S.2 (15) of the Act "not involving the carrying on of any activity for profit" only qualified "any other object of general public utility" and not "relief of the poor, education, medical relief". It was further held, and that is the more important aspect as far as these references are concerned, in Commissioner of Income-Tax, Kerala v. Indian Chamber of Commerce ((1971) 80 ITR. 645) that "In order to take on object of general public utility outside the scope of the definition in S.2(15) of the Income-tax Act, 1961, on the ground that it involves the carrying on of an activity for profit, that object must involve the carrying on of any activity for profit. "Involve" means comprise or imply and the object must, therefore, imply the carrying on of any activity for profit. It is not sufficient, if there is some activity carried on which results in prof it. There must be an activity in the form of business because the activity must be for profit and that activity for profit must be involved in the objects of general public utility ..". This interpretation of S.2(15) has not been adhered to by this Court in a later Full Bench decision in Dharmaposhana Company v. Commissioner of Income-Tax, Kerala (1974 KLT. 585). This interpretation of S.2(15) has not been adhered to by this Court in a later Full Bench decision in Dharmaposhana Company v. Commissioner of Income-Tax, Kerala (1974 KLT. 585). The view taken therein was that the word "involve" in the context must be understood as meaning "connect" or "link". It was therefore ruled that if the word is so understood "the last part of S.2(15) would mean that when the advancement of an object of general public utility is linked or connected with an activity for profit, that object would cease to be a "charitable purpose". This is how the latter part of the section must be interpreted". There was however no specific overruling of the earlier Division Bench rulings by the Full Bench This decision of the Full Bench was rendered on the 12th of June, 1974 and a few months later, dealing with an appeal from the decision of the Calcutta High Court in Commissioner of Income-Tax, West Bengal II v. Indian Chamber of Commerce ((1971) 81 ITR. 147) the Supreme Court in the decision in Indian Chamber of Commerce Commissioner of Income-Tax, West Bengal ((1975) 101 ITR. 796) Mr. Justice V. R. Krishna Iyer, speaking for the court emphatically overruled the dicta of this Court in Commissioner of Income-tax, Kerala v. Indian Chamber of Commerce ((1971) 80 ITR. 645) and in Commissioner of Income-Tax, Kerala v. The Cochin Chamber of Commerce and Industry (1972 KLT. 435). The matter has now been settled beyond controversy as far as this Court is concerned and it is clear that if the advancement of an object of general public utility is connected or linked with an activity for profit, then, the particular chanty must be outside the definition of S.2 (15) and the profits arising out of that charity will not therefore be exempt from tax. The Supreme Court has dealt with various aspects in detail in the judgment of the Supreme Court in the decision in Indian Chamber of Commerce v. Commissioner of Income-tax, West Bengal II ( (1975)101 I. T. R 796) and there is discussion in the judgment as to when it can be said that there is an activity for profit. The approach to be made in such circumstances has also been indicated in the judgment. 3. The approach to be made in such circumstances has also been indicated in the judgment. 3. We have already pointed out that the Tribunal has been influenced to a very large extent by the observations of this Court in the Commissioner of Income-Tax, Kerala v. Indian Chamber of Commerce ((1971) 80 I. T. R.645) if not entirely guided by that decision, which is evident from what is stated in Para.6 of the order of the Tribunal. It appears to us that the finding at the end of Para.8 that "These do not involve any activity for profits and on the facts we do not find anything to disentitle the Association from exemption" is a direct corollary to the observations in Para.6 of the order Whether in the circumstances of the case, there was any activity at all and if there was any activity, was there any activity for profit are matters which are to be considered by the Tribunal and a finding entered in the light of the observations of the Supreme Court in Indian Chamber of Commerce v. Commissioner of Incometax, West Bengal II ((1975) 011. T. R.796) because without such a finding being entered it is not possible for this Court to answer the first question referred to this Court. What is stated in Para.7 gives an indication of the items comprising the so-called income which was sought to be exempted by the assessee. One of these relates to interest on amounts left with the Association by its members which is credited in the accounts of the Association and another relates to rent, apparently of buildings owned by the Association and covered by the trust. It is contended by the assessee's counsel that these items of receipts cannot be said to be profits arising from an activity for profit. The other items referred to in Para.7 and 8 are contributions by brokers for licencing them and amounts received on sale of forms. It is contended by the assessee's counsel that these items of receipts cannot be said to be profits arising from an activity for profit. The other items referred to in Para.7 and 8 are contributions by brokers for licencing them and amounts received on sale of forms. In regard to these also it is contended by counsel that these are very small items and the Association was not carrying on any activity for profit in receiving contributions for issuing licences and in selling forms and counsel relied on certain observations of the Supreme Court in Indian Chamber of Commerce v. Commissioner of Income-Tax, West Bengal 11 ((1975)101 I T. R.796) in support of the contention that these sums do not constitute profits arising from an activity for profit. We have not got even the necessary materials before us. Even the extent of the alleged income is not clearly known. These are aspects that have to be considered by the Tribunal and a finding entered. There has been no such finding entered. 4. In the light of the above, we have to follow the procedure adopted by the Supreme Court in Commissioner of Income-Tax, Bombay City 1 v. Greaves Cotton And Co. Ltd. ((1968) 68. I. T. R.200) and in Commissioner of Income-Tax, West Bengal 1 v. Indian Molasses Co. P. Ltd,. ((1970) 78 I. T. R.474). It will be open to the Appellate Tribunal to take back the appeal on its file and pass fresh orders in the light of what is stated above and in the light of the pronouncement of the Supreme Court in Indian Chamber of Commerce v. Commissioner of Income-Tax, West Bengal II ( (1975)101 I. T R.796). We have to further mention that it was conceded before us that if the income would fall under S.11 of the Act, no further question about that income falling under S.28 (iii) of the Act would arise. Question No. 2 referred to us cannot be answered in the abstract. It can be answered in favour of the assessee if it is found that the assessee is entitled to exemption under S.11 by stating that notwithstanding S.28 (iii) the income is exempted. If on the other hand, the income is not exempted under S.11, no question of exemption arises and it will fall under S.28 (iii). 5. It can be answered in favour of the assessee if it is found that the assessee is entitled to exemption under S.11 by stating that notwithstanding S.28 (iii) the income is exempted. If on the other hand, the income is not exempted under S.11, no question of exemption arises and it will fall under S.28 (iii). 5. We direct the Appellate Tribunal to deal with the appeals in the manner indicated above. 6. A copy of this judgment under the seal of the High Court and the signature of the Registrar will be forwarded to the Income-tax Appellate Tribunal, Cochin Bench.