Delhi High Court

Association Of State Road ... vs Deputy Director Of Income Tax ... on 20 December, 2000

Equivalent citations: 2001 79 ITD 607 Delhi

ORDER

R.K. Gupta, J.M.

These are four appeals by assessee against the orders of Commissioner (Appeals) dated 19-12-1996 and 31-12-1997 relating to assessment years 1989-90, 1990-91, 1993-94 and 1994-95. The issue involved in these appeals are denial of exemption under section 10(23C)(iv) of the Income Tax Act, 1961. It is further objected that the authorities below failed to appreciate that the income of the assessee was liable to the computed under section 11 of the Income Tax Act. The case was fixed for hearing on 27-7-2000. On that date of hearing, the assessee filed a copy of written submissions. At that point of time, the learned Departmental Representative stated that he wants to study the written submissions, therefore, the case was adjourned to 25-9-2000 and it was finally fixed for hearing on 1-11-2000.

2. Brief facts of the case are that appellant is an apex coordinating body of State Road Transport Undertakings. It was formed with the object of promoting, inter alia, research studies in transport economics, engineering and related matters. The governing body of the association was formed by representatives of all State Transport Undertakings in the country. The association is a registered society under the Registration of Society Act and the Secretary to the Government of India, Ministry of Transport is ex-officio President of the association. The Deputy Secretary in the Union Ministry dealing with the road transport is co-opted as ex-officio member of the association. The aims and objects of the assessee are to render common services to the members and assist them in such matters as standardization of equipment, purchase of materials for their own use at economical prices, promotion of efficiency of road transport services and reduction in the operational costs of the members. Article (v) of the Memorandum and Articles of Association prescribe that the income and property of the association howsoever derived shall be used towards the promotion of the objects set forth in its Memorandum of Association. The rules of the society may be amended by the Government of India from time to time and those amended rules shall be applicable. In the memorandum of association, it is clearly mentioned that no portion of income and the property of the association shall be paid and transferred directly or indirectly by way of dividends, bonus or otherwise howsoever, by way of profit to the persons who at any time were or have been members of the association or to any of them.

3. In sub-rules (iii) and (iv) of rule 20 of the Rules and Regulations of the assessee provide that the association shall not be dissolved without the consent of the Government of India, and, that, upon such dissolution, if any, property remaining after the satisfaction of all its debts and liabilities, shall not be paid or distributed among the members of the association but, shall be given to some other society, to be determined by the votes of not less than 3/5th of the members personally or by proxy at the time of dissolution.

4. Apart from membership fee received, the assessee has its main source of fund from commission or discount which it gets from suppliers ranging from 0.5 per cent to 2 per cent of the consideration for supply of parts approved by the association. The practice is that tenders are called for the spare parts of transport vehicles from different manufacturers, and, thereafter, having regard to quality and price, a recommendation is made to its members. The members, then, in their discretion, enter into contracts with the suppliers in the light of the said recommendations. On such orders placed by the members, the suppliers pay commission or discount to the appellant on the value of the goods supplied.

5. For the first time for assessment years 1965-66 to 1969-70, a dispute has arisen on the question whether the appellant is to be granted exemption from tax under provisions of section 11 of the Income Tax Act. The controversy was revolved around section 2(15) as it then stood and the question was whether the appellant was involved in the carrying on of any activity for profit. Accordingly, in these years, the assessing officer denied exemption by holding that the assessees aims and objects are not for the purpose of charitable but for earning profit. Matter travelled upto the stage of Tribunal and the difference of opinion arises between Accountant Member and the Judicial Member and the matter was referred to the Third Member. The Third Member originally held that the assessee was carrying on activity for profit. However, an application under section 254(2) was moved before the Third Member by relying on the decision of the Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Mfrs. Association (1980) 121 ITR 1 (SC) and then the Third Member rectified its order by holding that where profits derived were to be utilised for the purposes of the object of general public utility exclusively, it cannot be held that the object of the said association of general public utility, involved any activity for profit. The reliance was placed by the Third Member on the observations of the Supreme Court that what is necessary to be considered is whether having regard to all the facts and circumstances of the case, the dominant object of the activity is profit making or to carry out a charitable purpose. It was further observed that if it were the former, the purpose would not be a charitable purpose, but, if it were the latter, the charitable character of the purpose would not be lost. The issue before Supreme Court was that whether promotion of commerce and trade in art, silk yarn, raw silk, cotton yarn etc. which was clearly an object of general public utility, and, profit was merely a bye-product which resulted incidentally in the process of carrying out the charitable purpose. Then it was held that the profit so derived could not be held to be from an activity with profit motive and, as such, it did not amount to carrying on an activity for profit. Accordingly, the appeals of the assessee were allowed for assessment years 1965-66 to 1969-70 and department also granted exemption under section 11 of the Income Tax Act.

6. For the first time thereafter, a dispute arisen for assessment year 1989-90 when section 10(23C) was injected by the Direct Tax Laws (Amendment) Act with effect from 1-4-1989. Accordingly, the assessee was required to explain that why exemption claimed by assessee should not be negatived. Detailed explanation was filed before assessing officer and after considering the detailed submissions, the assessing officer was of the view that the exemption cannot be allowed to the assessee. While denying so, the assessing officer has considered the Notification issued by Central Board of Direct Taxes for granting exemption under section 10(23C) and conditions laid down through this Notification, in assessing officers view, were not satisfied by the assessee. It was observed by the assessing officer that assessee was required to maintain separate books of account for that business but assessee failed to keep separate books of account and thus is not entitled for any benefit under section 10(23C)(iv) or under section 11 of the Income Tax Act. The assessing officer also considered the contention of the assessee that Tribunal has allowed appeal of the assessee filed for assessment years 1965-66 to 1969-70. It was observed by the assessing officer that these findings of the Tribunal was based on the finding of Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association (supra) and after considering the order of the Tribunal, it was observed by the assessing officer that with effect from 1-4-1989, the amendments in section 2(15), section 10(23C)(iv) and section 11(4A) of the Income Tax Act were made wherein it was prescribed that where business income if it is incidental to achieving main charitable objects of the society should not be taxed, if society maintains separate books of account for such business. Accordingly, it was held that the order of the Tribunal is not applicable from assessment year 1989-90. Therefore, the exemption was denied for all these four years under appeal here before us. Commissioner (Appeals) confirmed the order of the assessing officer for all the four years.

7. Now, assessee is in appeal here before us for all these four years against the order of the Commissioner (Appeals).

8. Learned counsel of the assessee placed reliance on the written submissions filed on 27-7-2000. In reply, the learned Departmental Representative heavily placed reliance on the order of the authorities below. It was further submitted by him that the main source of the assessees income from commission which is incidental to objects of the society. Accordingly, the separate books of account were supposed to be maintained which assessee failed to do so. Accordingly, the lower authorities were right in rejecting the claim of the assessee. It was further stated that no doubt to attain the object, some income is needed that may be income from business or for charitable activity. The separate set of books of account has to be maintained with effect from 1-4-1989 as the relevant sections were amended for this purpose only. It was also stated that there is a specific condition laid down by section 10(23C)(iv) that when the business is incidental then separate books of account have to be maintained. The assessee has income which is incidental to the main activity, therefore he was supposed to maintain the separate set of books of account which he did not. Accordingly, the action of the authorities below should be sustained. It was also stated that total income earned by assessee is not added for the purpose of taxability as only commission income is added and on this amount only, the exemption was denied. At this point of time, a query was raised by the Bench that how the commission income earned by assessee is used. In reply, the learned Departmental Representative fairly admitted that commission earned by the assessee is used for charitable. But it was further stated that conditions laid down under section 10(23C)(iv) were not fulfillled. Further the reliance was placed on the decision reported in CIT v. Dharmodayam Co. (1997) 225 ITR 686 (Ker) and Thanthi Trust v. CBDT (1995) 213 ITR 639 (Mad).

9. In reply, the learned counsel of the assessee stated that assessing officer himself is admitting that the activity of the assessee is not for profit but to attain the main object. As assessee did not maintain separate books of account, therefore, the exemption is denied which is totally wrong as the assessees activities are of nothing but to attain its aims and objects. It was further stated that the main aims and objects of the society are for the purpose of charitable and not for the purpose of earning any profit. Attention of the Bench was drawn on the copy of memorandum, wherein it is clearly mentioned that no portion of profit, which remained after repaying all debts and liabilities, will be distributed among the members of the society. Regarding separate set of books of account, it was stated that assessee is earning only commission income and for that purpose, the books of account are maintained. Therefore, there is no question of maintaining any separate set of books of account as assessee is not doing any other business.

10. We have heard the rival submissions and have considered them carefully. We have also perused the material on which our attention was drawn. We have also gone through the case laws relied on by the parties here before us. After considering all these materials, we noted that the main crux of the issue is that whether assessee was liable to maintain any separate books of account or not. Both the parties were agreed on the proposition that the income earned by assessee was used only for the purpose of charitable. Activities, as already stated while noting brief facts, were held to be activities for charitable purposes. This contention is not in dispute. The assessee is assessed to tax since long and from 1965-66 to 1988-89, the department has allowed the exemption to the assessee by holding that assessees activities are for charitable purpose. The dispute arisen from assessment year 1989-90 when section 10(23C)(iv) was injected and one of the condition was that if the business is incidental to the main aims and objects of the assessee then separate set of books of account are to be maintained. In this regard, the Central Board of Direct Taxes had issued a circular, by which it was notified that assessee is entitled for deduction under section 10(23C)(iv) for assessment years 1989-90 and 1990-91. The conditions laid down by the circular were as under :

(i) the assessee will apply its income or accumulate for application, wholly and exclusively to the objects for which it is established.

(ii) the assessee will not invest or deposit its funds (Other than voluntary contributions received and maintained in the form of jewellery, furniture etc) for any period during the previous years relevant to the assessment years mentioned above otherwise than in any one or more of the forms or modes specified in sub-section (5) of section 11.

(iii) This notification will not apply in relation to any income having profits and gains of business, unless the business is incidental to the attainment of the objectives of the assessee and separate books of account are maintained in respect of such business.

11. Clause (iii) of this Notification is applicable on the facts of the present case. The assessing officer noted that assessee is carrying on business of rate contract on behalf of State Road Transport Corporations which in his view was not business for charitable objects. Thus, it was held by the assessing officer that it is incidental to main objects of the society. Therefore, the assessee was liable to maintain separate books of account for that business. The assessee failed to keep separate books of account, thus exemption was denied. Here, we are of the view that assessing officer misunderstood the facts of the present case. The assessee started its business activity by formulating rules and regulations for the purpose of attaining its aims and objects which were of charitable in nature as assessee was promoting, inter alia, research studies in transport economics, engineering and related matters and they were held as for charitable purposes. Therefore, we failed to understand here that main object of the assessee is to promote the aims and objects for which it was established and for attaining these aims and objects, the assessee was doing the work of contract for various State Transport Authorities and was helping them to purchase the materials or in supplying the information relating to their business activities and when the material was purchased by the respective transport authorities, then the assessee was used to charge commission at the rate of 0.5 per cent to 2 per cent from the supplier and this commission income was used to attain the aims and objects of the society. Therefore, in our considered view, the only business which was done by the assessee was that of earning of commission and the same was used to attain the aims and objects. Therefore, in our considered view, no separate books of account are required. Separate books of account are required when there are more than one business and, in the present case, the assessee is not doing any other business. All the details of commission, which were received by the assessee, are incorporated in the books of account and a profit and loss account was prepared, and then if there is any profit earned by it, the same was used for attaining the aims and objects of the society which was undisputedly charitable in nature.

Therefore, in our considered view, on the facts of the present case, no separate books of account are required.

12. Further, we noted that while deciding the appeal for assessment years 1965-66 to 1969-70, the Tribunal has held that activity of the assessee was not for the purpose of profit as the profit earned by it was used for the purpose of charitable only. Therefore, we do not feel that the detailed observations observed by the Tribunal should be repeated here. The learned Departmental Representative has also fairly admitted that the commission earned by the assessee was used for attaining the aims and objects of the assessee. However, it was stated that the assessee was required to maintain a separate books of account. As we have already stated above that the assessees only income is from commission and the same was used for attaining the aims and objects of the assessee. Therefore, we hold that assessee was entitled to commission under section 10(23C)(iv). By presuming for a moment that if assessee was required to maintain separate books of account, then in that case also, we are of the view that assessee was entitled for the exemption under section 10(23C) because this is undisputed here that the entire income earned by the assessee was used for the purpose of attaining the aims and objects of the assessee. Therefore, this is immaterial that assessee is doing business (a) or (b) or both, as income from all sources is used for the purpose of attaining the aims and objects and which is not in dispute. Therefore, we feel that assessee, in any case, is entitled for exemption. We have considered the case laws relied upon by the assessee in the cases of Apparel Export Promotion Council v. Asstt. Director of Income Tax (1996) 57 ITD 609 (Del), Director of Income Tax v. Shilpam (1998) 230 ITR 126 (Cal) and Thanthi Trust (supra) and if the ratio of these decisions are taken into account then also assessee deserved to succeed in its appeals. The reliance placed by the learned Departmental Representative in the case of Dharmodayam Co. (supra) and Thanthi Trust (supra). In these cases, the Honble Kerala High Court and Honble Madras High Court has held that if the business of the assessee is for the purpose of its business objects then the assessee would have to satisfy the condition of clauses (a) and (b) of section 11(4A) to be eligible for exemption. In both these cases, the exemption claimed under section 11 was allowed to the assessee. However, principles for claiming exemption were laid down. The principles laid down in these valuable decisions were that if conditions as per clauses (a) and (b) of sub-section (4A) of section 11 are fulfillled then the exemption under said section is allowable. Here in the present case, the facts are distinguishable as assessee is not required to fulfill all these conditions because the assessees business is wholly for the purpose of charitable and not for any other purposes. The assessees business is not for earning any profit but for attaining the aims and objects of the society. Therefore, in our considered view, the assessee is not required to fulfill the conditions laid down under clauses (a) and (b) of sub-section (4A) of section 11.

13. Therefore, in view of all these facts and circumstances and observations made above, we hold that assessee is entitled for exemption under section 10(23C)(iv) for all these four appeals. Accordingly, the assessing officer is directed to allow the exemption.

14. The main ground of the assessee has been allowed here by us as above. Therefore, we do not feel to adjudicate upon the other ground raised by the assessee in its appeals as they are consequential in nature to the main ground.

15. In the result, the appeals of the assessee are allowed.