TMI Blog1994 (10) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, 1961 on the ground that the entire capital has been provided by the Government, and that the provisions of Road Transport Corporation Act, provides that the balance of income left after utilisation of the net profits for the purposes of set off under section 30 of the R.T.C. Act was to be made over to the State Government for purpose of road development and are to be utilised for financing the expansion programmes of the Corporation. In the instant case, similar circumstances are not prevailing and the claim of the assessee for exemption under section 11 cannot be allowable. " 3. In appeal, the assessee's claim for exemption was accepted by the Commissioner (Appeals) by observing in para 5(ii) as under : " The purpose of the establishment of the Corporation is evident in the G.O. Ms. No. 498, cited above. It is clearly to help the weavers of the State. The appellant Corporation buy yarn from the Spinning Mills and supplies it to weavers and gets the cloth woven by them by payment of wages to them at specified rates. The cloth is sold to the public through its own outlets and other Government agencies. The promotion of the welfare of the weavers and the rehabilitation of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed the returns for the assessment years 1978-79 to 1985-86. Therefore, nothing can be said about the trading results achieved by the assessee during these accounting years. The position for the other years is as under : Asst.year 1986-87 Loss returned Rs. 11.05 lakhs --do-- 1987-88 Net profit as per P L a/c Rs. 36.88 " --do-- 1988-89 --do-- Rs. 81.05 " --do-- 1989-90 --do-- Rs. 23.61 " From the details given above, it may be seen that right from the assessment years 1987-88 onwards, the assessee-Corporation has earned substantial profits although no dividends have been declared so far. With regard to the assessee's contention that it has been formed for the advancement of an object of general public utility as laid down under section 2(15) of the Income-tax Act, it may be mentioned that all the activities of the assessee as detailed above are commercial in nature and with a view to earn profit. In fact, it has earned substantial profits for the 3 assessment years as mentioned above. With regard to the welfare/rehabilitation of Weavers it may be mentioned that the assessee is doing nothing special other than a commercial firm which also provides yarn and other inputs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs/beneficiaries of the Corporation through their co-op. Societies. (ii) The Corporation purchases products/articles from the members through its Societies and provide assistance to the members. Thus, the beneficiaries under the corporation are the persons belonging to the S.T., who are actually involved in carrying on the assessee's business. (iii) Also there is a provision for the declaration of dividends and the dividends are paid to the member Societies which serve their constituents, i.e., to say the members or the beneficiaries are entitled to receive/share the profits of the assessee's corporation. In the assessee's case, though the assessee corporation claims to have formed for the up-liftment of Weavers community, the entire capital was contributed by the A.P. State Government. That is, the weavers are not the shareholders or members and they are not entitled to dividends/surplus. Secondly, the weavers are paid remuneration by piece rate for their services similar to other job workers who were doing stitching and dyeing jobs. Although there is a provision for declaration of dividends, they have to be paid only to the Government of Andhra Pradesh, because it is the so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objects, the performance dictated by such clauses cannot be any better. 6. Observing that his predecessor-in-office opined that the provisions of section 11 (4A) were not applicable to the appellant's case because the work relating to the appellant corporation was carried on mainly by the beneficiaries, viz., the weavers. He has distinguished the assessee's case from that of Girijan Co-operative Corporation Ltd.'s case and held that the weavers who are the necessary adjuncts to the appellant's business cannot be equated to the Girijans who are the beneficiaries of the Girijan Cooperative Corporation Ltd.'s case . As per the charter of the appellant corporation evidenced by the Articles and Memorandum of Association and in terms of the appellant's actual case history over the period right from inception, the weavers, he held, have no active participatory role in the conduct of the appellant's business. The disbursement of the wages to weavers cannot, he observed, be construed as a benefit to them, since it was in recognition of services rendered by them, the weavers cannot be said to be carrying on the business by contributing their labour for wages, that the employment for wages ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iation did not refer to the weavers as the beneficiaries of the reserve fund or of the dividends declared. In such a context, what is the benefit accruing to the weavers? In his view section 11(4A)(b) contemplates a situation where there would be a total anastomosis of thought and deed between the institution and the beneficiaries. In the instant case, the weavers are totally distanced from the assessee-corporation. Thus in his opinion section 11(4A)(b) which was visualised for a totally different purpose cannot be transplanted into the assessee's case, which has nothing in common with the institutions referred to in that section. He then referred to the decision of the case of Auroboutique Trust v. ITO [IT Appeal Nos. 421 437 (Mad.) of 1987] and reproduced in his order the relevant portion which is as follows : " The main part of sub-section 4A is that nothing in the provisions of section 11 to exempt the income from tax shall apply to profits and gains of business. The embargo is on every kind of profits and gains from business irrespective of how it is derived who derives it. It is only the exception to the embargo which talks of two cases that of an income derived by religi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. [1982] 136 ITR 67 (Bom.) and the decision of the Rajasthan High Court in the case of CIT v. Maharana of Mewar Charitable Foundation [1987] 164 ITR 439 (Raj.). On the basis of the aforesaid decisions, the learned counsel for the assessee submitted that the entire capital of the assessee corporation is owned by the Government of Andhra Pradesh. Though there is a provision for declaration of dividend, no dividend has been declared so far because of absence of profits and in any case even if the dividend was to be declared it would go to the A.P. Government and would not be a fetter against charitable nature of the Corporation. He further submitted that the funds have been utilised for making up the losses and therefore, that was an application for charitable purposes. He also referred to the audit certificate incorporating the application of income at ' Nil ' because the entire amount was spent by the assessee for charitable purposes. He then referred to registration granted under section 12A of the Income-tax Act by the Commissioner of Income-tax and stated that the charitable nature of the society has been recognised by the Commissioner himself. Referring to sub-section (4A) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai Charities v. CIT [1992] 197 ITR 416, he submitted that the articles contained in the Articles of Association are contrary to the Government's order intending to set up the corporation. Referring to the decision of the A. P. High Court in the case of Girijan Co-operative Corporation Ltd., he submitted that it was a co-op. society set up and the benefit under its bye-laws was reserved only for Girijans. The decision of the Tribunal in the case of A. P. Essential Commodities Corporation, he submitted, is distinguishable. In that case, the trade was not for the purpose of profit but to help the general public. The clause authorising declaration of dividend was omitted and these factors were the main consideration before the Tribunal to decide the issue in favour of that assessee. On the contrary, he submitted that the decision of this Tribunal in the case of A.P. State Warehousing Corporation is squarely applicable wherein it was held that the object of the society as in this case was to earn profit. He then referred to and relied up on various decisions referred to by the Commissioner (Appeals) and also the decision of the A.P. High Court in the case of A.P. State Civil Supplies Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... religious purposes to the extent to which such income is applied to such purposes in India ; and where any such income is accumulated or set apart for application to such purposes in India, to the extent to which the income so accumulated or set apart is not in excess of twenty-five per cent of the income from such property ; " Sub-section (4) of section 11 provides that for the purposes of this section property held under trust' includes a business undertaking so held. The term ' trust ' has been defined in Explanation 1 to secticn 13 of the Act that for the purposes of section 11 etc., ' trust ' includes any other legal obligations. The word ' charitable purpose ' is defined in section 2(15) to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The assessee is admittedly holding a business undertaking which is to be treated as a property held under trust if there is any. The dispute in this appeal is as to whether the assessee corporation is a trust within the meaning of the Explanation 1 to section 13 read with section 11(1)(a). It would be a trust if it falls within the phrase " any other legal obligation " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t where two or more persons hold one or more shares in the company jointly, they shall for the purposes of this definition, be treated as a single member. Article V of the Memorandum of Association provides for the capital of the company. It states that ' the authorised share capital of the company is Rs. 5,00,00,000 (Rupees Five Crores) divided into 5,00,000 (Rupees five lakhs) equity shares of Rs. 100 (Rupees one hundred) each, with power to increase, reduce the capital for the time being into several cases and to attach thereto respectively, such preferential, guaranteed, qualified or special rights, privileges and conditions as may be determined by or in accordance with the Articles of Association of the company and to vary, modify, amalgamate or abrogate any such rights, privileges or conditions in such manner as may for the time being be provided by the Articles of Association. Parts II, III, IV, V and VI of Articles of Association containing Articles 6 to 33 deal with various aspects of the issue, allotment, lien, transfer of shares and alteration of capital. In none of the clauses of Memorandum of Association and Articles of Association, there is obligation that the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um of Association and Articles of Association which nowhere binds it, to the avowed objects contained in the Memorandum of Association. He referred to the Supreme Court decision in the case of Heavy Engineering Mazdoor Union v. State of Bihar 3 SCR 995, wherein the Heavy Engineering Corporation was held to be acting on its own under the authority of its Memorandum of Association and Articles of Association and not as a servant or an agent of the Central Government and, therefore, the reference to the Industrial Disputes under section 10 of the Industrial Disputes Act, 1947 was held not to be made to the Govt. Reliance was also placed by the Commissioner (Appeals) on the decision of the Supreme Court in Praga Tools Corporation v. C.A. Immanuel 3 SCR 773 wherein it was held that a Corporation incorporated under the Companies Act did not have a statutory or public duty imposed upon it. He also referred to the decision of the Supreme Court in the case of S.L. Agarwal v. General Manager, Hindustan Steel Ltd. 3 SCR 363 wherein it was held that a Company incorporated under the Companies Act is not a Department of the Govt. inasmuch as it has a separate and distinct legal entity. He, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted under the Companies Act, have a corporate personality of their own, distinct from that of the Govt. of India. The land and buildings are vested in and owned by the Companies, the Govt. of India only owns the share capital ". We find, therefore, ourselves in agreement with the Commissioner (Appeals) for the proposition that the Government and the Corporation owned by the Govt. are two distinct and separate legal entities and the Corporation owned by the Government is not Government itself nor a wing/department of the Government. Therefore, unless the memorandum of association and Articles of Association of the Company depicts a character of the Company to be that of a charitable nature, it cannot be held to be so. In other words, the ' legal obligation ' of the assessee-company to call it a trust wholly for charitable purposes u/s 11 has to be seen from its Memorandum of Association/Articles of Association. 18. Examining various clauses of the memorandum of association, the Commissioner of Income-tax (Appeals) further held in assessment year 1988-89 that there is no mention whatsoever to the upliftment of weavers per se either in the main object or in the ancillary objects in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all reserve for decision of the State Government :-- (1) Rules of the Company governing the conditions of service of the employees, provident fund and other rules creation of Reserve and Special Fund, (2) Sale lease or disposal otherwise of the whole or substantially the whole of the undertaking of the Company ; (3) Formation of a Subsidiary Company. Art 121. Rights of the Government.-- Notwithstanding anything contained in any of these Articles, the Government may from time to time, issue such directives it may consider necessary in regard to the conduct of the business of the Company or Directors thereof, and in like manner may vary and annul such directive. The Board shall give immediate effect to the directives so issued. " The entire capital of the assessee-company is to be owned by the A.P. Govt. as depicted in the G.O. dated 6-5-1975 and even as a matter of fact the entire capital owned by the A.P. Govt. No further capital can be issued or existing shares could be transferred without the concurrence or knowledge of the A. P. Govt., it being a private limited company restricting the right of the transferability of its shares and prohibiting any invitation to publi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny activity for profit ' immediately after the stated ' object of general public utility ' were deleted only with effect from 1-4-1984. If a Government company or a public sector undertaking or, as stated by the CIT (Appeals), all such companies, are established with the object of general public utility and are engaged in pursuing that object, every such company would be charitable institution for the purposes of section 11 . 21. With this background, let us examine whether the assessee-corporation is established with a legal obligation so as to be a ' trust wholly for charitable purposes '. The main object of the assessee is to promote, own, establish, aid and assist rehabilitation, growth and development of the Handloom (cotton, wool and silk), Powerloom, all types of including leather garment manufacturing and Sericulture Industries, both within and outside the Co-operative fold. This is the dominant and primary purpose of the assessee-corporation. Other objects appearing in clauses (2) to (38) in the Objects clause of the memorandum of Association of the company are merely powers incidental to the carrying out of the dominant and primary purpose. This is also evident from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has the provision for declaring dividend, creating reserves for equalisation of dividend and distribution of assets to shareholders which are of private gains and contrary to the basic character of charity. The assessee has full discretion to deploy the profit in the manner it wants and, therefore, as decided in Indian Sugar Mills Associations's case , Surat Art Silk Cloth Manufacturer's case and Dhamiadeepti v. CIT [1978] 114 ITR 454 (SC), where the relevant rules and regulations permitted distribution of profit, it would be inconsistent with the object of public utility. The registration of the assessee-company as private limited company, of course, gives an impression that it is for private gains or purposes, but, as aforesaid, its objects are charitable purposes within section 2(15) of the IT Act, to pursue the object of general public utility. There is no bar in law or a legal disability for a private company to engage in charitable activities. For being a charitable institution, it is not necessary that it should be registered under section 25 of the Companies Act. This section provides : " 25(1) Where it is proved to the satisfaction of the Central Government that an asso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s it thinks fit from time to time deal with and vary such investments and dispose of all or any part thereof for the benefit of the Company and may divide the reserve funds or any part thereof in the business of the Company ; and without being bound to keep the same separate from the other assets. " " XX. DIVIDENDS 92. Dividends.-- The profits of the Company available for payment of dividend subject to any special rights relating thereto created or authorised to be created by these presents and subject to the provisions of these presents as to the reserve funds and amortisation of capital shall, with the approval of the Government be divisible among the members in proportion to the amount of capital held by them respectively : Provided always that (subject as aforesaid) any capital paid up on a share during the period in respect of which a dividend is declared shall only entitle the holder of such share to an apportioned amount of such dividend as from the date of payment. 93. Declaration of Dividends.-- The Company in annual general meeting may declare dividend to be paid to the members according to their rights and interests in the profits and may fix the time for p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertificates, and may fix the value for distribution of any specific assets and may determine that cash payments shall be made to any members upon the footing of the value so fixed or that fractions of less than Re. 1 may be disregarded in order to adjust the rights of all parties and may vest any such cases of specific assets in trustees upon such trusts for the persons entitled to the dividend or capitalised fund as may seem expedient to the Board. Whether requisite, a proper contract shall be filed in accordance with section 75 of the Act, and the Board may appoint any person to sign such contract on behalf of the person entitled to the dividend or capitalised fund, and such appointment shall be effective. 99. Effect of transfer.-- A transfer of shares, shall not pass the right to any dividend declared thereon after such transfer and before registration of the transfer. 100. Retention in certain cases.-- The Board may retain the dividends payable upon shares in respect of which any person is under the transmission clause (Article 25) entitled to become a member or which any person under that clause is entitled to transfer until such person shall become a member in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... validate the charity. Almost similar clauses were there in A.P. State Civil Supplies Corporation's case dealt with the issue to resolve the difference between the Accountant Member and the Judicial Member. It noted a Supreme Court decision in this regard in the case of CIT v. A. P. State Road Transport Corporation [1986] 159 ITR 1, wherein the amount left over after utilisation for the purposes set out in section 30 of the Road Transport Corporations Act was to be made over to the State Government for the purposes of road development and it did not form part of the general revenue of the State. The said provision of the Act did not spell out details of how the road development was to be done etc. That was left to the discretion of the State Government. Applying that logic, the Special Bench held that in the case of APSCSC also, under Art. 6 the income of the company had been declared to belong to Price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh, that, therefore, a legal liability had been created by Art. 6 whereby all income vested in the said Fund, that ownership vested in the Fund as such and the amount did not go into the coffers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oad transport corporation is established and to prescribe the manner in which the general duty of the corporation set out in section 18 is to be performed. It is now firmly established by the decisions of this court in Surat Art Silk Cloth Manufacturers Association's case [1980] 121 ITR 1 (SC) and Bar Council of Maharashtra's case [1981] 130 ITR 28(SC) that the test is ' What is the predominant object of the activity -- whether it is to carry out a charitable purpose or to earn profit '? If the predominant object is to carry out a charitable purpose and not to earn profit, the purpose would not lose its charitable character-merely because some profit arise from the activity. " 26. Furthermore, the mere fact that the assessee carries on an activity for profit or is engaged in carrying on a business is of no consequence after 1-4-1984 with effect from which date such an activity no more remains as a prohibition as the prohibition stands deleted from the definition of ' charitable purpose ' defined in section 2(15) of the IT Act. As regards the private gain also, the decision in the case of Girijan Co-op. Corporation Ltd. is an authority applying which the Special Bench held in para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . One of the objections raised by the Revenue is that the assessee was not registered under section 12A of the Act. This section provides that the provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the following conditions are fulfilled, namely :-- " (a) the person in receipt of the income has made an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Chief Commissioner or Commissioner before the 1st day of July, 1973, or before the expiry of a period of one year from the date of the creation of the trust or the establishment of the institution, whichever is later : Provided that the Chief Commissioner or Commissioner may, in his discretion, admit an application for the registration of any trust or institution after the expiry of the period aforesaid ; (b) where the total income of the trust or institution as computed under this Act without giving effect to the provisions of section 11 and section 12 exceeds twenty-five thousand rupees in any previous year, the accounts of the trust or institution for that year have been audited by an accountant a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spent 75 per cent of its income of a year, to accumulate or set apart for such purpose for a period not exceeding 10 years. The income to the extent of accumulation is not included in the total income of that year if deposited in the forms or modes specified in sub-section (5) of section 11. In a case where such accumulated income is utilised for any purpose other than charity or ceases to remain accumulated for application or deposited as per section 11(5) or is not utilised for the stated purposes within a period of 10 years, the income to that extent will be included in the total income of that year in which it is so applied, ceases to be so accumulated or invested or as the case may be immediately after the expiry of the period of account. Such investment of accumulated income is to be made within 6 months as per rules. The objection of the Revenue in the words of the CIT (Appeals) is : " As a matter of fact, the annexure in Form No. 10B does not specify how the profit of Rs. 81,85,357 is sought to be employed. The entire annexure is interspersed with the observations like ' nil ' and ' not applicable '. This coupled with the unbridled discretion the appellant enjoys by virt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch business. " The CIT (Appeals), in the appeal for assessment year 1984-85, held that there was no violation as the work relating to the assessee-corporation was done by its beneficiaries, i.e., weavers, whereas the CIT (Appeals) in the subsequent year held that they were paid only wages for their work and they have no active participatory role in the conduct of the assessee's business ; that the disbursement of wages to weavers cannot be construed as a benefit to them, since it was in recognition of services rendered by them ; that the weavers cannot be said to be carrying on the business by contributing their labour for wages ; that the employment for wages in the course of carrying on of business cannot be construed as an advancement of any other object of general public utility ; that the weavers are not in the same position as Girijans as in the case of Girijan Co-operative Corporation Ltd. ; that the fact that the weavers are required byway of wages would not make them the beneficiaries ; that section 11(4A)(b) contemplates a situation where there would be a total anastomesis of thought and deed between the institution and the beneficiaries ; that in the instant case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We also find ourselves in agreement with the finding of the CIT (Appeals) in assessment year 1988-89 that the position of Girijans in the case of Girijan Co-op. corporation was different. In that case, the provisions of sub-section (4A) of section 11 were not the subject-matter of consideration. We, therefore, hold that the assessee-corporation violated the provisions of section 11(4A) of the IT Act and, therefore, its business would not be exempt under section 11 of the Act. 32. To conclude, we hold that (i) the assessee-corporation is a charitable institution as envisaged in section 11 and (ii) its income from business does not enjoy the exemption under section 11 because it does not satisfy the conditions laid down in sub-section (4A) thereof. 33. The cross-objection by the assessee for assessment year 1987-88 is only to support the order of the CIT (Appeals). For the reasons stated in setting aside the order of the CIT (Appeals), the cross-objection is dismissed. 34. In the result, the appeal of the Revenue for assessment year 1986-87 is allowed while the cross-objection for assessment year 1987-88 and the appeals for assessment years 1988-89 and 1990-91 by the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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