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TMI Blog1995 (2) TMI 131X X X X Extracts X X X X X X X X Extracts X X X X ..... urable practice, to discourage and to suppress malpractices, to settle disputes amongst brokers, dealers and jobbers to decide all questions of usage, custom or courtesy in conducting the business of brokers, dealers and jobbers, and 2. To facilitate, assist, regulate and control the transaction of business on the stock exchange and to establish and provide for and manage clearing house for the transactions of the members." 3. The objects incidental or ancillary. to the attainment of the above mentioned main objects-inter alia included the following-viz : " 11. To invest the money of the Exchange not immediately required in such securities as may from time to time be thought fit. 12. To remunerate any person, firm or company for services rendered in placing or assisting to place or guaranteeing the placing of any debenture or other securities of the Exchange. 13. To establish and support or aid in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit members or employees or ex-employees of the Exchange or ex-members of the exchange and the dependents or connections of any such persons and to grant pensions and allowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tures or securities of any other company having objects altogether or in part similar to those of the Exchange. 21. To carry on business as financiers, promoters, concessionaries, managers, secretaries, treasurers, agents or managing agents and any other business which may be conveniently carried on with the above. 22. To receive moneys, securities and valuables of all kinds of deposit or for safe custody with or without remuneration therefor and on such terms and conditions as the Exchange may deem fit ; Provided that in case of deposits from the public, it shall be in accordance with section 58A of the Companies Act, 1965 and Rules thereunder as per the directions of the Reserve Bank of India from time to time ; provided further that the Exchange, however, shall not carry on any banking or insurance business. 23. To make advances on the security of any bonds, shares or real and personal property of any kind and on such terms as the Exchange may deem fit. 24. To undertake and to act as clearing house for delivery and payment of shares, stocks, debentures, Government securities and otherwise both for members as well as for the investing public and do all acts either banking or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted to 500. The sources of income/funds of the Exchange were from admission fees of Rs. 2500 per member for the first three years from the date of recognition and Rs. 5000 thereafter, annual subscription of Rs. 2000 per member, security deposit of Rs. 50,000 per member, each member was entitled to be represented in respect of his business by authorised assistants/clerks whose number was not to exceed four, until and unless otherwise fixed by the counsel. The employing member was further required to pay to the Exchange a security deposit of Rs. 5000 for each authorised assistant/clerk and in case the authorised assistants/clerks also dealt with public and procured orders for the member on the floor, they were required to pay additional security of Rs. 5000 each. 5. The Exchange filed its return of income for the year under consideration on 29-7-1988 declaring its taxable income at nil it claimed that the members admissible fees amounting to Rs. 4,47,500 work as capital receipts. These receipts were shown under the head " capital fund " in the balance-sheet. Excess over expenditure amounted to Rs. 2,91,237. The Exchange claimed exemption under sections 11, 12 of the Act in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to taxability of the income of the Exchange with reference to the provisions of sections 11 and 12 of the Act as also the issue of 'mutuality' as raised in ground No. 4 filed before him by the Exchange. 8. By his order under appeal, the ld. CIT(A) has held that exemption under sections 11 and 12 of the Act is not available to the Exchange as its various objects permitted it to carry on business activities as well. He held that the Exchange was not a 'charitable institution' within the meaning of section 2(15) of the Act. In this behalf, the ld. CIT(A) examined various objects as mentioned in the Memorandum of Association of the Exchange and compared them with the objects of other exchanges which were examined at the levels of the High Courts concerned and found disentitling those Exchanges for exemption under sections 11 and 12 of the Act. In support of his conclusions, the ld. CIT(A) made reference to a number of High Court and Supreme Court decisions. The ld. CIT(A) further held that since the entire income was accumulated application under section 11(1) was wrongly made as section 11 (2) and not Expl. 2(a) of section 11(1) was applicable in the case of the Exchange. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that behalf. It was submitted that in the event of winding up all the benefit is to go to the members and, therefore, there was complete identity between the contributors and the participators. In support of his arguments, the ld. counsel relied upon the case of CIT v. Madras Race Club [1976] 105 ITR 433 (Mad.). 11. The ld. D/R on the other hand, supported the order under appeal and further submitted that the Exchange was engaged in business activities and this did not have the character of a charitable institution, so as to enable it to exemption under sections 11 and 12 of the Act. He further submitted that the limited liability of the members and the benefit of the surplus profit going to persons other than the members of the Exchange clearly establish that there was no complete identity between the contributors and the participators and thereupon the benefit of the doctrine of mutuality was not available to the Exchange. 12. The first question that we address ourselves to is whether the objects attained or intended to be attained by the assessee-Exchange are such as may be called 'Charitable purposes' within the meaning of the term defined in section 2(l5) of the Act and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares and like securities but also to facilitate, assist, regulate and control the transaction of business on the stock Exchange and to establish and provide for and manage clearing house for the transactions of the members. The main objects aim at maintaining high standards to commercial honour and integrity, providing honourable practices, discouraging and suppressing malpractices, settling disputes amongst brokers, dealers and jobbers, deciding all questions of usage, custom or courtesy in conducting the business of brokers, dealers and jobbers. The activities of the brokers, dealers, & jobbers in stocks, shares and like securities were to lead to the advancement or promotion of trade, commerce and industry resulting in economic prosperity enured for the benefit of entire community. Such prosperity would be shared not only by the brokers, dealers or jobbers or other persons who are actively engaged in trade, commerce and industry but also by those who stand to gain from the growth and progress of the national economy. It is thus seen that the main or primary objects to be attained by the Exchange are to promote commerce, trade and industry leading to the economic prosperity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of a public or impersonal nature uniting the potential beneficiaries into a class. Clause 13 thus runs in a direction which is opposite to that of 'charitable purpose' and goes beyond the scope of 'object of general public utility' used in the language of sec. 2(15). This clause and other clauses which, directly or indirectly, help or may help the assessee to attain the object of clause 13 are repugnant to the very spirit of 'charity' and are detrimental to and destructive of the primary or main objects, which undoubtedly confer the character of a charitable institution upon the assessee-Exchange. 17. In the case of Yogiraj Charity Trust v. CIT[1976] 103 ITR 777, their Lordships of the Supreme Court held that if one of the objects of the trust deed is not of a religious or charitable nature and the trust deed confers full discretion on the trustees to spend the trust funds for an object other than of a religious or charitable nature, the exemption from tax is not available to the assessee. But their Lordships further observed that if the primary or dominant purpose of a trust is charitable, another object which by itself may not be charitable but which is merely ancillary or in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d other such clauses as may be attracted for the attainment of the objects of clause 13, exemption under section 11 should not be available to the assessee-Exchange in view of Supreme Court decision in Yogi Raj Charity Trust's case. But at the same time we find that the primary or dominant purpose of the assessee is of the nature of 'general public utility'. other clauses in Paragraph B are ancillary or incidental to the attainment of the primary or dominant purposes. Such primary or dominant purposes and those ancillary or incidental to them are separable from those in clause 13 and other such clauses which may be called in aid that clause without causing damage to or hindrance in the attainment of the main objects. Moreover, the establishment of an association, institution, fund or trust for the exclusive benefit of the members or employees or ex-members or ex-employees or their dependants and connections is a possible event that may or may not happen in future. Such an event is not stated to have happened in the year under consideration, which is stated to be the first year of the functioning of the assessee-Exchange. The assessee-Exchange is not under any obligation to establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjects and since the assessee is not found to have exercised its discretion under clause B-13 in the year under consideration, benefit of exemption under section 11 would be available to it provided other conditions as laid down in sections 11, 12 and 12A are found to have been fulfilled. 22. The next question that arises for consideration is whether the provisions of section 11(1), Explanation 2 or those of section 11(2)(a)/(b) are applicable to the case of the assessee. The case of the assessee-Exchange is that since it had a surplus of Rs. 2,91,237 for the year under consideration, it had duly given a notice under section 11(1) read with Explanation 2 within the stipulated time, disclosing its intention to utilising the same in the next year. The case of Revenue, as advanced by the ld. D/R on the strength of the findings of the ld. CIT (Appeals) is that since the income applied or deemed to have been applied to charitable purposes exceeded 75 per cent of its income for the year under consideration, therefore, the provisions of section 11(2) and not of 11(1), Explanation 2 applied to its case. The ld. D/R further submitted that since the conditions requisite for application of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come applied to such purposes in India during the previous year immediately following the previous year in which the income was derived as does not exceed the said amount, may at the option of the person in receipt of the income [such option to be exercised in writing before the expiry of the time allowed under sub-section (1) of section 139 for furnishing the return of income] be deemed to be income applied to such purposes during the previous year in which the income was derived ; and the income so deemed to have been applied shall not be taken into account in calculating the amount of income applied to such purposes, in the case referred to in sub-clause (1), during the previous year in which the income is received or during the previous year immediately following, as the case may be, and in the case referred to in sub-clause (ii), during the previous year immediately following the previous year in which the income is derived. " " Section 11(2) : where seventy-five per cent of the income referred to in clause (a) or clause (b) of sub-section (1) read with Explanation to that sub-section is not applied, or is not deemed to have been applied, to charitable or religious purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over-looked or under-estimated. The notice to be given in Form No. 10 aim at giving certain and to serve specific purposes and, therefore, compliance of section 11(2) read with rule 17 may reasonably be expected of a charitable institution. 27. Rule 17 runs as under : " The notice to be given to the Assessing Officer or the prescribed authority under sub-section (2) of section 11 or under the said provision as applicable under clause (21) or clause (23) of section 10 shall be in Form No. 10 and shall be delivered before the expiry of the time allowed under sub-section (1) of section 139, for furnishing the return of income." 28. Form No. 10 is as follows : " Notice to the Assessing Officer/Prescribed Authority under section 11(2) of the IT Act, 1961. To The Assessing Officer/Prescribed authority .......................................................................... .......................................................................... I ............ on behalf of............... (name of the trust/institution/association) hereby bring to your notice that it has been decided by a resolution passed by the trustees/governing body, by whatever name called, on............ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the amount accumulated or set apart has been/will be, before the expiry of six months commencing from the end of each previous year, invested in the Govt. or other specified securities. Para-3 of the notice requires the assessee to furnish copies of the annual accounts of the institution or trust with details of investments and utilisation before the expiry of six months, as aforementioned or before 30th of June, immediately following such previous year, whichever is earlier. Thus the importance of a notice under section 11(2) in cases of accumulation or setting apart a certain sum or certain percentage of the income of the previous year to carry out specific purpose of the institution or trust cannot be minimised. 30. We agree with Mr. Mehta that the substance and not the form of a document should be the basis for decision on the issue which is relevant to that document. The mode or manner of expression of the intention of a person may take different forms depending upon the knowledge, learning and education of such person of the relevant subject. Viewed thus the form of expression is not found as an essence of the notice under section 11(2). The contents of the notice, if exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the present year is the first year of its activity before us and for the subsequent years the assessee-Exchange has been given exemption under section 11 by the Department itself, we direct that time be not considered as essence of the requirements of paras 1 and 2 of the notice in Form 10 of Rule 17 of the Rules. We take particular note of the fact that the Assessing Officer did not raise such an objection in his order and in appeal, the assessee should not be placed in a position worse than that he would have been in case he would have not preferred the appeal. The Assessing Officer would therefore not lay too much stress on technical compliance of the requirements in notice under Rule 17. In his, discretion he may as a special case, allow the assessee to fulfil such conditions, if not already complied with in order to regularise the proceedings. This concession should not be considered as the opinion of the Tribunal on the fulfilment/requirement of the notice under section 11(2). 33. The next issue in this appeal is regarding the doctrine of 'mutuality'. The basic and essential requirement for the application of this doctrine for the benefit of the assessee is that there mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debts and liabilities and expenses of winding up of the Exchange, any net surplus assets or property whatsoever, the same shall not be paid to or distributed among the members of the Exchange but shall be handed over or transferred to such other body or organisation or a company having objects similar to the objects of the Exchange or to anybody constituted mainly for the benefit of the public in the advancement of knowledge, commerce or with objects beneficial to the advancement of any other object of general public utility and the promotion of industry, commerce and art, to be determined by the members of the Exchange at or before the time of dissolution or merger or amalgamation in default thereof, by the High Court of Judicature that has or may acquire jurisdiction in the matter. " 37. The above provision of the Article of Association makes it abundantly clear that the surplus was not intended to go to the contributors of the common fund. Assessee's claim is misconceived and has rightly been rejected by the ld. CIT (Appeals). 38. The next issue relates to assessee's claim for treating the amount of Rs. 4,47,000 (or according to assessee Rs. 4,02,500 which aspect of assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s profits and gains derived from carrying on business. The words 'performing specific services' in section 10(6) mean 'conferring particular benefits', that is, conferring on the members some tangible benefit which would not be available to them unless they paid the specific fees charged for such special benefits. The word 'remuneration' is a term of much wider import than 'wages' and includes 'recompense', 'reward' or 'payment'." 40. A similar treatment to such kinds of receipts was given in the case of Delhi Stock Exchange Association Ltd. The contention of Mr. Mehta that both these cases are distinguishable on facts is not correct. We have closely studied these cases and found the facts therein quite identical to those in the instant case. This contention too is, therefore, rejected. 41. In ground No. 5, the assessee has contended that the CIT(A) has erred in law as well as on facts in not considering the amount spent as capital expenditure during the year as income applied and also meeting amount of expenses/liabilities of earlier years during the year as application of income for the purposes of sections 11 & 12. Since we have remitted a part of the issue relating to notic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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