1997 (11) TMI 59 - HC - Income Tax

Summary

Issues Involved:
1. Status of the assessee (whether it should be considered a "guarantee company" or an "association of persons").
2. Eligibility of the assessee for exemption under section 11 of the Income-tax Act for the assessment years 1976-77 to 1979-80.

Detailed Analysis:

1. Status of the Assessee:
The primary issue was whether the assessee should be treated as a "guarantee company" or an "association of persons." The assessee filed returns claiming the status of a "guarantee company," but the Income-tax Officer initially assessed it as a "company" for the purpose of section 11 of the Income-tax Act, 1961. Later, the assessments were reopened under section 147(b) of the Act, and the status was changed to an "association of persons."

The Appellate Assistant Commissioner (AAC) held that the reopening of the assessments for the years 1976-77 and 1977-78 was unjustified as it was based on a change of opinion. However, for the years 1978-79 and 1979-80, the AAC held that the status should be that of a "guarantee company."

The Tribunal upheld the AAC's decision, noting that for over two decades, the Revenue had accepted the assessee's status as a "guarantee company" and allowed exemptions under section 11. The Tribunal found no change in circumstances to justify altering this status. The High Court agreed with the Tribunal, stating that the Income-tax Officer was not justified in adopting the status of the assessee as an "association of persons" merely because it was not registered under section 25 of the Companies Act, 1956. The Court concluded that the assessee should be treated as a "guarantee company."

2. Eligibility for Exemption under Section 11:
The second issue was whether the assessee's objects could be considered charitable, thereby qualifying for exemption under section 11 of the Income-tax Act. The Tribunal held that the primary object of the assessee was to promote trade and commerce, which is an object of public utility. The Tribunal found that the offending objects cited by the Revenue were merely incidental to the main charitable object.

The High Court referred to the Supreme Court's decisions in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association and CIT v. Andhra Chamber of Commerce, which established that the primary purpose of promoting trade is a charitable object if it does not involve profit-making activities. The Court found that the subsidiary objects (clauses (q) and (r) of the memorandum of association) were incidental and did not negate the charitable nature of the primary object.

However, the Revenue argued that the assessee must be legally compelled to utilize its income solely for charitable purposes to qualify for exemption. The High Court agreed that the absence of a legal prohibition against distributing profits to members could disqualify the assessee from exemption under section 11. The Tribunal had not considered whether the memorandum of association or bye-laws imposed such a legal obligation.

The High Court directed the Tribunal to examine whether there was a legal obligation in the assessee's memorandum of association or bye-laws to use its income exclusively for charitable purposes. The Court cited the Delhi High Court's decision in Delhi Stock Exchange Association Ltd. v. CIT, which held that the mere non-distribution of profits does not suffice; there must be a legal obligation to use the income for charitable purposes.

Conclusion:
1. The High Court affirmed that the status of the assessee should be taken as that of a "guarantee company."
2. The High Court directed the Tribunal to reconsider whether there is a legal obligation against the distribution of profits among the members of the assessee to determine eligibility for exemption under section 11 of the Income-tax Act.

The reframed questions were:
1. Whether the status of the assessee should be taken as that of a "guarantee company"?
2. Whether the exemption under section 11 of the Income-tax Act should be allowed for the assessment years 1976-77 to 1979-80?

The first question was answered in the affirmative, and the second question was answered in the negative, with a directive for further examination by the Tribunal.