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TMI Blog1997 (11) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... 77 and 1977-78 claiming the status of "guarantee company". The Income-tax Officer initially assessed the assessee for both the assessment years and treated the assessee as "company" for the purpose of section 11 of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"). The Income-tax Officer, however, reopened the assessment under section 147(b) of the Act and in the reassessments made for the said assessment years 1976-77 and 1977-78, adopted the status as an "association of persons". Similarly, the assessee filed its returns of income for the assessment years 1978-79 and 1979-80 in the status of a guarantee company, but the Income-tax Officer assessed the assessee in the status of an "association of persons". The assessee carried the matter by way of appeal before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner held that the reopening of the assessment for the assessment year 1976-77 and 1977-78 was not justified as the reopening was done on the basis of change of opinion. The Appellate Assistant Commissioner, however, in the appeals preferred for the assessment years 1978-79 and 1979-80 held that the status of the company should be tak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for collection of dues to members according to decision of the association; (h) to have correspondence with members and other associations to protect the interest of members and to improve their interests; (i) to improve legislation about trade and commerce, initiate legislation and approve of the same; (j) To co-operate with such association or bodies having similar objects to improve, gather information from such bodies and to inform them of the improvements in trade and commerce; (k) to spend for temple Kattalais, temple gardens, free libraries and trade expenses; (l) to purchase or take on lease, for the purposes of the objects of the association land and building, construct such buildings and to maintain and repair the same; (m) to sell properties not required by the association and to invest them in known banks, deposit them and to put them in current account; (n) to collect mahimai from members and rents from members for the expenses mentioned above; (o) to meet the expenses of incorporation, printing charges, advertisement, salary for staff, travel expenses and stamps; (p) to associate with other societies or associations not having objects contrary to the object ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question that arises is whether the objects of the assessee-company can be treated as charitable in nature. The relevant objects of the assessee-company as found in the memorandum of association have been set out in detail in the earlier part of the judgment. The prominent object of the assessee was to promote trade and commerce and in the light of the decisions of the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1 and in CIT v. Andhra Chamber of Commerce [1981] 130 ITR 184, the dominant or the primary purpose of the assessee is the promotion of trade and it is an object of public utility not involving the carrying on of any activity to earn profit. The objects which were relied upon on behalf of the Revenue, viz., clauses (q) and (r) are only incidental and subsidiary objects to the primary purpose which are charitable in nature. The subsidiary objects would not render the main object of the assessee non-charitable, and the objects of the assessee are still charitable in nature. The following passages in Surat Art Silk Cloth Manufacturers Association's case [1980] 121 ITR 1 (SC) are relevant and would be applicable to the facts of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and they cannot be regarded as objects of the assessee-company. In our view, the clauses (q) and (r), even if they are considered to be the objects of the association, they are only subsidiary objects and would not militate against the main objects of the assessee, namely, to promote the trade and commerce and would not render the assessee a non-charitable institution. We are also of the view that the clauses (q) and (r) of the memorandum of association can be regarded as only powers conferred on the assessee to embark upon such activities and, therefore, we are of the view that the objects of the assessee are charitable in nature and the assessee is entitled to exemption, provided other conditions are satisfied. The next contention that was advanced on behalf of the Revenue is that even assuming that all the objects of the assessee are charitable in nature, the claim for exemption by the assessee under section 11 of the Act must fail as there are no clauses in the memorandum of association compelling the assessee to utilise the income only for such purposes. According to learned counsel for the Revenue, the assessee being a guarantee company, is free to utilise the income by dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... element of distribution of profits among the members and there is nothing to show that the profits have been distributed among the members of the assessee-company. We have carefully considered the rival submissions of the parties. It is not disputed that the assessee-company did not get the necessary approval from the appropriate Government either under section 26 of the Companies Act, 1913, or under section 25 of the Companies Act, 1956. We have already held that the assessee-company is liable to be treated as a guarantee company. The Appellate Tribunal placed reliance on the fact that the profits of the assessee-company have not been distributed among the members of the company. The mere fact that the profits were not distributed among the members during the relevant years would not be sufficient to claim that the assessee is entitled to the exemption under section 11 of the Act. This court in the case of CIT v. Madras Stock Exchange Ltd. [1976] 105 ITR 546 considered the scope of the provisions of section 37 of the Companies Act which relates to companies limited by guarantee and after noticing the views expressed in Palmer's Company Law held that the fact that the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of association or the restrictions found in the bye-laws of the assessee-company. It solely relied upon the fact that the surplus income of the assessee was not utilised for any purpose other than the objects of the assessee. As held by the Delhi High Court in Delhi Stock Exchange Association Ltd.'s case [1980] 126 ITR 532, even assuming that all the objects of the assessee are charitable in nature, the claim for exemption would fail when there is no legal obligation compelling the assessee to utilise the income only for such purposes. The Delhi High Court, in that context, held as under : "These provisions are very widely worded and, considering these also in the light of the important fact that the company is at complete liberty to distribute its profits by way of dividends, we have no doubt in our minds that the company was at complete liberty to deal with its profits in any manner it liked. It was not under any compulsion in law to hold the profits or to utilise them wholly or even in part only for religious or charitable purposes. It would have been perfectly legitimate for the company to have distributed its entire profits among its members and to have set apart or utilised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee's claim for exemption can succeed. We have already seen that the Appellate Assistant Commissioner has referred to a clause in the memorandum of association as well as clause 69 of the bye-laws of the assessee-company. Since the Tribunal has not gone into the question whether there was a legal obligation imposed upon the assessee-company to utilise or apply its income only for the charitable objects, we are of the view that the Tribunal should consider the question whether there was a legal obligation imposed by the memorandum of association or the relevant bye-laws to distribute the profits for its charitable purposes. Though we answer the question of law on the facts found by the Tribunal in favour of the Revenue, the Tribunal, however, is directed to consider the question whether the assessee is entitled to exemption under section 11 of the Act in the light of the observations made by us above. The question of law referred to us consists of two parts and they are not interconnected with each other and, therefore, we reframe the question as under : "1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding tha ..... 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