TMI Blog2002 (12) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessment year 1990-91. Since the issues, fact and law are common, both the appeals are disposed of by this common judgment. The respondent-assessee is incorporated as a company limited by guarantee under the Companies Act, 1956, and is a non-profit service organisation. For the assessment years 1989-90 and 1990-91 returns were filed by the assessee along with the audited income and expenditure accounts and balance-sheets for the relevant previous years. The assessee claimed the benefit of section 11 of the Act on the ground that it was an institution established wholly for "charitable purposes" within the meaning of section 2(15) of the Act and had been registered as such under section 13 of the Act. The Assessing Officer (hereinafter referred to as the "AO") denied the benefit of section 11 on two grounds. First, he held that the respondent-assessee was a diamond bourse and as such its objects were not "charitable purpose" within the meaning of section 2(15) of the Act. Secondly, he took the view that, even if so, the assessee had breached the conditions under section 13 and as such was liable to be denied the benefit of section 11. The assessee carried the matter in appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trust for charitable or religious purposes or a charitable or religious institution, any income thereof- (i) if such trust or institution has been created or established after the commencement of this Act and under the terms of the trust or the rules governing the institution, any part of such income enures, or (ii) if any part of such income or any property of the trust or the institution (whenever created or established) is during the previous year used or applied, directly or indirectly for the benefit of any person referred to in sub-section (3)." Section 13(2) provides as under: "...(a) if any part of the income or property of the trust or institution is, or continues to be, lent to any person referred to in sub-section (3), for any period during the previous year without either adequate security or adequate interest or both;..." The relevant provision of section 13(3) is: "The persons referred to in clause (c) of sub-section (1) and sub-section (2) are the following, namely:-- (a) the author of the trust or the founder of the institution;..... (cc) any trustee of the trust or manager (by whatever name called) of the institution;...." Section 2(15) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " for the purposes of storage and clearance of diamonds, gems, etc. On the same day, another notification was issued under section 45(1) of the Customs Act approving the MMTC as the custodian of the imported cargo of such goods until their clearance in accordance with the provisions of the Customs Act. It was also notified that MMTC would be the custodian with regard to the export cargo until they are transhipped and handed over to the airlines at Sahar International Airport, Bombay. When the MMTC was appointed as the Custodian, it had incurred expenditure on behalf of Bharat Diamond Bourse to the extent of about Rs. 81 lakhs for setting up of the bourse. On August 31, 1984, the managing committee of the assessee resolved to treat the expenses incurred by the MMTC as a loan which was to be returned with interest at 6 per cent. per annum. The MMTC had taken certain premises on lease in the Diamond Plaza which were sub-leased to the assessee on the same terms and conditions except from the deposit. The principal object of establishment of the bourse was to facilitate the diamond trade so that maximum revenue could be earned by way of foreign exchange and also to make the diamond trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The decision of the Constitutional Bench of this court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1; [1980] 2 SCC 31 really clinches the issue. The assessee in Surat Art Silk's case [1980] 121 ITR 1 (SC) was an association established to promote commerce and trade in art silk yarn, raw silk, cotton yam art silk cloth, silk cloth and cotton cloth. Its objects, as evidenced from the memorandum of association, included, inter alia, carrying on business in art silk yarn, raw silk, cotton yam, art silk cloth, silk cloth, silk cloth and cotton cloth belonging to and on behalf of its members as well as buying and selling and dealing in all kinds of cloth and yarn belonging to and on behalf of its members. The Constitutional Bench of this court held that, if there are several objects of the institution, some of which are charitable and some non-charitable, and the trustees or the managers in their discretion may apply the income of the institution of those objects, the trust or institution would not be liable to be regarded as charitable and no part of its income would be exempted from tax. Where the main or primary objects are distributive, each and ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to carry on trade and commerce in diamonds with speed and in secure conditions. (ii) To establish and promote effective liaison between diamond trade and industry in India and abroad with a view to promoting their sales from India in international market. (iii) To promote, advance, protect and develop trade, commerce and industry in India relating to exports and imports of diamonds; and (iv) To develop India as modern and sophisticated diamond market by establishing and maintaining an international trading centre in India for all those engaged as manufacturers, traders, exporters and imports, brokers/commission agents of diamonds." These being the pre-dominant objectives, we agree with the view taken by the Tribunal as well as the High Court that the assessee was rightly registered under section 11 by treating it as an institution established for charitable purpose within the meaning of section 2(15) of the Act. The next question which needs our attention is, whether the Tribunal was right in its conclusion that the assessee did not lose the benefit of the exemption under section 11. The Assessing Officer took the view that the assessee lost its benefit under section 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er which the premises were to be acquired/leased. The reason for the money not being handed over directly to the builder is explained by the assessee by saying that it preferred to trust Bharat S. Shah as his credibility and solvency were beyond doubt. For this reason, the assessee preferred to keep the money deposited with the said Bharat Shah with the object of procurement of suitable premises as and when the building became ready. The Assessing Officer issued summons under section 131 of the Income-tax Act to Bharat Shah and, in response to the summons, he made a statement in writing by letter dated February 7, 1992. According to Bharat Shah, he had received Rs. 70 lakhs as part payment from the assessee during the year ending March 31, 1989, towards deposit of lease money in respect of renting one full floor in the premises at Diamond Village, Gamdevi to Bharat Diamond Bourse to house the customs, custodian and other facilities of the assessee. According to Bharat Shah, he, his family members and business associates had entered into agreement to purchase the entire 11th floor in the building known as "Diamond Village" at Gamdevi, Bombay, towards which they had already paid Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the interest of the Bourse." On April 27, 1988, a letter was addressed to Bharat S. Shah by the Vice President of the Bourse in which it was expressed that the managing committee of the bourse was desirous of renting one full floor in the Diamond Village at 55, Gamdevi to house the customs, custodian and other facilities of the Bourse and that it was agreeable to pay Rs. 20 per sq. ft. of super built up area and to pay a deposit of rent for five years interest free, all the outgoings including municipal tax would be on the account of the bourse and, if there was central air-conditioning, the bourse would pay contribution separately for the cost and maintenance thereof. After having said this a request was made to Bharat S. Shah "will you please now negotiate on behalf of the owners of the premises and draw up the necessary documents in our favour. In order to facilitate your working, the Bourse will provide you adequate amount as per clause above. When the documentation is ready, money may be handed over to them with a receipt". On November 28,1988, the following note confirming the arrangement was made: "The managing committee of the bourse in its meeting held on 11th Febr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cient for the Assessing Officer to take a different view as to the real nature of the transaction. As on the date on which the money was paid to Bharat Shah, it was neither intended as deposit for lease of premises, nor was it intended as deposit to be paid to the builder. There is no evidence that any premises were procured or agreed to be procured in the name of the bourse from any builder. The builder's name is not known till today. If at all there was any substance in the story that Bharat Shah was merely negotiating on behalf of the assessee for procurement of suitable premises, the lease for the premises, the ownership of the premises or the lease rights would be in favour of the respondent assessee with the builder as lessor or seller. The Assessing Officer was, therefore, justified in concluding that the amount of Rs. 70 lakhs, when it was paid to Bharat Shah, was clearly intended for his buying the premises in Diamond Plaza building which in turn, may have been made available by way of a sub-lease to the respondent. If this be so, then the payment to Bharat Shah could hardly be a deposit. The stand of the respondent is completely belied by Bharat Shah's statement made pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order, without critical appraisal. We are surprised that the entire agreement between Bharat Shah and the assessee was supposed to be an oral agreement, which was supposed to have been terminated orally with Bharat Shah being orally called upon to return the money with interest of 12 per cent., which he is said to have refused. In our view, this story does not ring true and could not have been accepted by any reasonable person, instructed in law. It is wholly unnatural, because one does not expect hard-nosed businessmen to part with an amount of Rs. 70 lakhs without even recording an agreement under which it is paid, nor without agreeing upon the precise terms of the lease. The story rings false from beginning to end, and yet, the Tribunal accepted it by saying, "as regards the bona fides of the transaction, in our opinion, there is nothing to suspect the same." The Tribunal says, "there is a transparency about the entire transaction which nullifies any attempt to make out the transaction as something unusual and out of the ordinary." That diamonds are not transparent, that they dazzle with a brilliance that blinds the eye, seems to have escaped the notice of the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -"The founding or building of a college or hospital. The incorporation or endowment of a college or hospital is the foundation; and he who endows it with land or other property is the founder." He also relied on the meaning of the expression in Corpus Juris Secundum, Volume XXXVII, page 37, which is: "Founder's shares in English company law, shares issued to the founders of, or vendors to, a public company as a part of the consideration for the business, or concession, etc., taken over, and not forming a part of, the ordinary capital." The meaning of the expression "founder" highlighted by learned counsel is with reference only to an institution of eleemosynary. Eleemosynary is a charitable object intended to provide relief from distress to humans based on Christian values. In the case of the assessee, it is not recognised as a "charity" because of the element of eleemosynary; it is recognised as a "charity" because of the extended meaning ascribed to the concept of charity under the Act as its predominant object is an "object of general public utility". The test to ascertain the founder of an institution for eleemosynary need not be valid to ascertain the founder of an insti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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