1. This second appeal is directed against the order dated 24-3-1988 passed by the Commissioner of Income-tax (A)-IX, New Delhi in respect of assessment year 1984-85. The primary contention in ground No. 1 is that the learned CIT(A) erred in holding that the assessee was not entitled to total exemption under the provision of Section 11 of the Income-tax Act, 1961 in respect of its total income derived during the accounting period ending 30-9-1983. The alternative contentions are that it has been wrongly held by the CIT(A) that, (a) the activities carried on by the assessee trust were business activities yielding profits and gains within the meaning of the provisions of Section 11 (4A) of the Act and that consequently a sum of Rs. 13,46,203 was income chargeable to tax, rejecting the assessee's claim that it was not carrying on any activity other than that for the purposes of advancement of its objects and general public utility; (b) alternatively and without prejudice to the above the CIT(A) wrongly held that assessable profits and gains amounted to Rs. 3,67,700 by ignoring to deduct considerable expenditure from the gross receipts earned from carrying on the alleged business activity; (c) CIT(A) erred in treating the receipts arising from selection of personnel, course receipts, consultancy services, publication and hiring of machinery as business receipts and (d) CIT(A) erred in upholding the application of Section 11 (4A) to the case by the assessing officer for denying exemption under Section 11.
2. In ground No. 5 charging of interest under Section 217 is contested.
In ground No. 6, which is again alternative, it has been stated that net income, if at all, should be Rs. 3,239. The last ground reads as follows:- Assuming but not admitting that certain profits and gains arise from carrying on the impugned activity - the consequent of such assumption would lead to computation of loss under other heads of income, which is necessarily to be set off against the assessed profits and gains of business.
3. To understand and adjudicate the issues some history must necessarily be stated and which is, that the assessee is a Society registered under the Societies Registration Act, 1960 under registration No. 4237 dated 14-8-1969. The Society took over the assets, properties and engagements of the then unregistered institute known as "The Institute of Marketing and Management" of New Delhi. The objects of the Society listed in the Memorandum of Association must be brought in close focus and, therefore, reproduced as follows: - 1. To take over the assets, properties and engagements of the present unregistered Institute known as the "Institute of Marketing & Management" of New Delhi.
2. To stimulate and promote thought and effort towards development, education, training and research in the field of marketing and management by providing appropriate forum for exchange of knowledge, experience and ideas of sound marketing and management practices, including lectures, conferences, round tables, symposia, seminars, demonstrations, visits and conducting research studies.
3. To conduct research studies in the fields of Marketing and Management and other allied subjects of economics and other social and physical sciences.
4. To provide opportunities and facilities for marketing and management studies, discussions, training and research, by cooperation with other educational and research institutions: (a) developing course of instructions in marketing and management, and to diffuse useful knowledge in allied subjects, and (b) organizing students, educationists, professionals, businessmen, industrialists and Government officials' participation therein.
5. To print and publish books, booklets, pamphlets, circulars, papers, periodicals and other publications so as to advance knowledge in scientific marketing and management and not for profit 6. To promote and conduct or to assist in promoting and conducting a school of marketing and management and holding professional examinations and conferring professional degrees, diplomas and certificates.
7. To establish, form, furnish and maintain libraries and reading rooms having books, papers and periodicals on marketing and management and related subjects.
8. To organise or establish branches, regional or sub-offices in any part of India or abroad for achieving and promoting the aims and objects of the Institute.
9. To institute and establish grants, scholarship awards and prizes for encouragement of study in the art and science of marketing and management.
10. To promote and maintain effective liaison with all organisations interested in marketing and management in India and abroad.
11. To provide offices, conference rooms, libraries, reading rooms, clubs, workshops, laboratories or other buildings and conveniences in connection therewith, and to furnish, equip and maintain and conduct the same, and to permit the same and other property of the Institute to be used for members either gratuitously or for payment 12. To enter into any arrangement or agreement with any other Institute or associations having objects similar to the Institute and to join any association or amalgamation of Institutes or associations having such similar objects and to grant affiliation to any institute or association having such similar objects.
13. To collect and circulate statistics and other information relating to marketing and management in all its branches.
14. To accept subscriptions from member or donations from members and others in furtherance of all or any of the purpose or for the provision of the expenses of the Institute.
15. To do all such other lawful things as the Institute may think incidental or conducive to the attaining of the objects of the Institute or any of them. However, none of these engagements shall be for profit.
4. Before proceeding further the provision of Section 11 (4A), which was inserted by the Finance Act, 1983 w.e.f. 1-4-1984 should be closely noticed and, therefore, reproduced below, because the primary basis of the Revenue's case for this year has been that though for the earlier years the Tribunal held that the assessee was a charitable institution exempt under Section 11, but the said provision brought a sea change:- 11. Income from property held for charitable or religious purposes.
- (4 A) Sub-section (1) or Sub-section (2) or Sub-section (3) or Sub-section (3 A) shall not apply in relation to any income, being profits and gains of business, unless - (a) the business is carried on by a trust wholly for public religious purposes and the business consists of printing and publication of books or publication of books or is of a kind notified by the Central Government in this behalf in the Official Gazette; or (b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution, and separate books of account are maintained by the trust or institution in respect of such business.
5. In the context of the above provision the heading of Section 11 is reproduced below: Sub-section (1) provides that subject to the provision of Sections 60 to 63, the following income shall not be included in the total income of the previous year of the person in receipt of the income - (a) income derived from property held under trust wholly for charitable or religious purposes, to the extent to which such income is applied to such purposes in India etc. etc.
We have only referred to Section 11 and Sub-section (1) and have not mentioned the provisions of Sub-section (2) or Sub-section (3) or Sub-section (3A), because these are not relevant for adjudicating the present appeal.
6. As noted by the Tribunal in I.T.A. No. 1821 (Del.)/84 in respect of assessment year 1979-80, order dated January 11,1984, the membership of the Society was drawn from Government departments, statutory bodies, public sector companies, the cooperative sector and the private sector companies, as also from various professionals, academicians and those interested in various fields of marketing management.
7. The Society had all along been assessed as an Association of Persons and its income was being exempted under Section 11 on the ground that the assessee was a charitable society. Up to assessment year 1978-79 all along the income had been assessed at Nil. The assessment for the assessment year 1979-80 was completed by the ITO on 27-2-1982 and, as in the past, the assessee was allowed exemption under Section 11 and total income computed at Nil. Subsequently, the CIT, Delhi-VI exercising his powers under Section 263(1) of the Act issued a notice by raising the following issues:- (i) Applicability of Section 13(l)(c) as regards payment of Rs. 1,24,692 as remuneration and other benefits (including the commission of 10% of the gross revenue payable) to Dr. Jagjit Singh and his relatives being persons covered by Section 13(3) had not been considered by the ITO. (ii) Payments made to Dr. Jagjit Singh for daily expenses and taxi charges for visits outside Delhi were not disallowed to the extent they exceeded the ceiling prescribed under Section 37(3)/rule 6D. Applicability of Section 13(2)(c) was also not considered as regards such payments.
(iii) Receipts of the Institute included Rs. 8,230 as consultation fee for selection of personnel. This activity should have been considered under Section 13(l)(bb) and treated as receipts from business activity. This was not done.
8. Though the assessee resisted the proceedings under Section 263(1) but the Commissioner passed the order on 24-2-1984 and held, beside others, that in any case Rs. 22,831, which had been received by the assessee on account of selection of personnel (Rs. 8,230) and research consultancy was purely a business activity, there being nothing charitable in it and it could not be said to be covered by any part of the definition of the term "charitable purpose". The Commissioner held that such activity was also not carried on in carrying out the primary purpose of the Institute as against the total receipts of Rs. 22,831, related expenditure was only Rs. 6,210, which projected that the primary purpose was to earn profits, like any recruiting agency and accordingly income from such activity should have been brought to tax in any event in terms of Section 13(l)(bb) of the Act. The CIT 's final conclusion was in the following term: 14. Thus, I hold that contravention of Section 13(l)(c) has been made by the Institute in making excessive payment to Dr. Jagjit Singh and his relatives, covered under Section 13(3): Further, I hold that business activity has been carried on by the Institute in contravention of Section 13(l)(bb). The order of the ITO, Trust Circle-IV dated 27-2-1982 is, therefore, erroneous to the interest of Revenue and is set aside with the direction that the exemption under Section 11 is not allowable to the Institute. The IAC (Asst.) Range-XVII is directed to compute the income of the Institute in accordance with my above directions.
9. We have mentioned the above fact of the assessee's activity of selection of personnel and research consultancy because such activity has been considered as the primary cause for denying exemption under Section 11 for the year under appeal and for holding that the assessee was carrying on business and, therefore, clearly hit by the provision of Section 11 (4A).
10. There being no dispute that the Institute activities remained the same right from the beginning, it is considered expedient to reproduce paras 26 to 28 of the Tribunal order (supra) for 1979-80 because of two clear findings recorded therein that the assessee was not carrying on any business and that the provisions of Section 13(l)(bb) were not applicable:- 26. The next objection relates to the applicability of Section 13(l)(bb). We have already reproduced this provision. Attention was invited to the objects of the Institute. Some of these object clauses have been reproduced in paragraph 1 supra. The submission is that the assessee is engaged in a charitable purpose relating to the advancement of an object of general public utility not involving the carrying on of any activity for profit. Attention is invited to the finding of the ITO in the asst. order for this year. He has recorded there that the objects of the Society are to conduct research in the field of Marketing and Management. This particular finding has not been disputed by the CIT in his order under Section 263, and yet he has invoked Section 13(l)(bb), which refers only to the first three categories of charitable purpose, viz. relief of the poor, education or medical relief. The assessee institute does not come under any of these three categories. Hence Section 13(l)(bb) is not applicable at all. Alternatively, it is submitted there is no activity of the Institute which can be described as of business activity. Business connotes a systematic organised activity with the said purpose of earning profit. There is no such activity here. Attention is invited to page 128 of the paper book. This gives details of the income and expenditure of the institute as regards the work done by it in the selection of personnel for other organisations and in research consultancy. There are 11 parties in all, from whom there have been receipts to the extent of Rs. 22,831. All the receipts are on account of assistance rendered in the selection of personnel for these parties, e.g. Lakhani Rubber Works, Oswal Electricals, High Polymer Labs (P.) Ltd., Castrol Ltd., NSIC etc. As against this the expenditure incurred is Rs. 14,601 (Rs. 6,210 on account of advertisement and 8,391 described as research project expenses).
Hence, there is a net receipt of Rs. 8,213 as a result of this activity. Attention is then invited to page 98(b) of the paper book.
This gives the income and expenditure account for the year ended 30-9-1978, i.e., relevant previous year. Some of the receipts shown here are as under:- 27. The submission of the learned counsel for the assessee on the above facts is that it was not correct in law on the part of the CIT to have picked out a most insignificant item of Rs. 8,230 included on the receipts side of the income and expenditure account this year and on that basis to hold that the assessee is engaged in a business activity. The submission is that the receipts of Rs. 8,230 represent a wholly incidental receipt in the carrying out of the main objects of the society which have been held to be falling within the definition of charitable purpose in all the past years, as also for the subsequent years (at page 91) of the paper book is a copy of the assessment order of the ITO for the assessment year 1980-81 passed on 29-10-1982 under Section 143(3) exempting the income of the institute under Section 11. In any case, the submission is, in terms of Section 13(1)(bb) only the income derived from such business viz.
Rs. 8,230 can be brought to tax and not the entire income of the institute.
28. In our view, there is ho case for holding that the assessee is engaged in a business activity. All along in the past, it has been held that the objects of the assessee are to conduct research in the field of marketing and management. In none of the prior years, it has been held that the object clauses were covered by any of the first three categories of the definition of 'charitable purpose in terms of Section 2(15). It has not been held at any time in the past or by the CIT for this year that the dominant objects of the assessee society include relief of the poor, education or medical relief. There is no doubt a mention of 'education' in object Clause (2) of the Memorandum of Association. But such education is only an incidental part of the activities of the institute. It is difficult to describe the institute, on the facts on record, 'as a charitable trust or institution for education'. That being so, Section 13(l)(bb) is not applicable in terms at all. The order of the CIT on this point also, is to be vacated.
11. We have reproduced the above paragraphs of the 1979-80 ITAT's order because the order was followed for the assessment years 1980-81 and 1981-82 and 1982-83 also. An important factor, which must be noticed, is that for the year under appeal beside emphasising arid reiterating that selection of personnel and research consultancy constituted a definite business activity by the assessee and, therefore, Section 11(4A) hit the exemption claim, the IAC (Asst.) for his order denying exemption under Section 11 also held that, (a) salary and remuneration paid to Dr. Jagjit Singh and his relative employees were in excess of the limits prescribed in Section 13 of the Act; (b) that the commission paid to Miss Molijit Singh and Miss Erajit Singh, daughters of Dr.
Jagjit Singh for services rendered to the Society were also disallowable under the provisions of Section 13 of the Act.
12. The CIT(A) in the first appeal vide his order dated 24-3-1988 though agreed with the conclusion arrived at by the IAC(A),namely, that the receipts from the activities of the trust were to be treated as business income, decided the other issue namely, regarding the applicability of Section 13(l)(c) in relation to the salary and remuneration paid to Dr. Jagjit Singh and his relatives, in assessee's favour and held that the said section did not apply to such payments.
The Revenue has accepted such decision and this, according to us, is an important factor.
13. We have given the nature and quantum of receipts in respect of assessment year 1979-80 in para 26 above, and in that context we like to give figures of receipts and expenditure for the year under appeal also to Show that it would be highly illogical to treat the case on different footing than the treatment given for the assessment year 1979-80. The comparative figures for this year are as under:- From comparison of the above figures we notice that membership subscriptions have only marginally increased even after 10 years.
Receipts from publication, subscription, sale and advertisements have also remained in the same vicinity, inasmuch as, there is increase of only less than Rs. 7,000. The fee for selection of personnel, however, is of the order of Rs. 2,05,426, against which expenditure, as given at page 49 of the paper book, is very substantial. It can be nobody's case that training programme courses, seminars and conference receipts etc.
could be said to be business income though there are substantial increase in such receipts, as there are corresponding increase in expenses also.
14. The important factor to be noticed is that the surplus only amounted to Rs. 3,229 against the receipts of Rs. 26,12,801. Another aspect, which goes to the root of the matter, is Article 26 of the Memorandum of Association, which stipulates that 3/5th of the members of the Institute may determine that the Society may be dissolved and in such event of the matter, since it is a non-profit body, no part of the property could be distributed amongst the members of the Society but it 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. We have already mentioned above in this order that the membership of the Society was drawn from Government bodies, statutory bodies, public sector companies, the co-operative sector and others, including professionals, academicians and those interested in various fields of marketing management. Therefore, considering the membership and Article 26, which are reproducing below, there should have been no suspicion that the Society did or could engage in any business because it would be in violation of the objects of the Society as such:- 26.(1) Any number, but not less than three-fifth of the members of the Institute may determine that it shall be dissolved and thereupon it shall be dissolved forthwith, or at the time then agreed upon, and all necessary steps shall be taken of the disposal and settlement of the property of the Institute, its claims and liabilities, according to the rules of the said Institute applicable thereto, if any, and, if not, then as the Governing council shall find expedient, provided that, in the event of any dispute or arising among the said Governing Council or the members of the Institute, the adjustment of its affairs shall be referred to the principal court of original civil jurisdiction of the district in which the chief building of the Institute if situated and the court shall make such order in the matter as it shall deem requisite.
(2) If upon dissolution of the Institute, since it shall be a non-profit body, there shall remain after the satisfaction of all its debts and liabilities any property whatever, the same shall not be paid or distributed among the members of the said Society or any of them but shall be given to some other society, to be determined by the votes of not less than three-fifth of the members personally or by proxy at the time of dissolution, or in default thereof, by such court as before said in Clause (1) above.
15. At this stage we refer to the Hon'ble Supreme Court judgment in the case of Addl. CIT v. Surat Art Silk Cloth Mfrs. Association [1979] 2 Taxman 501/[1980] 121 ITR 1 for a limited purpose that if the prevailing motive is to earn profit then quantum of profit would be immaterial and if there is no motive of profit, a little surplus for the purpose of spreading out the objects of the Trust cannot have the effect of holding an activity as a profit motivated activity.
16. In the context of the basic controversy before us we consider expedient to extract part of the said judgment at pages 23 and 24 as follows:- The word 'involve' according to the Shorter Oxford Dictionary means 'to enwrap in anything, to enfold or envelop; to contain or imply'.
The activity for profit must, therefore, be intertwined or wrapped up with or implied in the purpose of the trust or institution or in other words it must be an integral part of such purpose. But the question again is what do we understand by these verbal labels or formulae; what is it precisely that they mean? Now there are two possible ways of looking at this problem of construction. One interpretation is that according to the definition what is necessary is that the purpose must be of such a nature that it involves the carrying on of an activity for profit in the sense that it cannot be achieved without carrying on an activity for profit. On this view, if the purpose can be achieved without the trust or institution engaging itself in an activity for profit, it cannot be said that the purpose involves the carrying on of an activity for profit.
Take, for example, a case where a trust or institution is established for promotion of sports without setting out any specific mode by which this purpose is intended to be achieved. Now, obviously promotion of sports can be achieved by organising cricket matches on free admission or no profit no loss basis and equally it can be achieved by organising cricket matches with the predominant object of earning profit. Can it be said in such a case that the purpose of the trust or institution does not involve the carrying on of an activity for profit, because promotion of sports can be done without engaging in an activity for profit. If this interpretation were correct, it would be the easiest thing for a trust or institution not to mention in its constitution as to how the purpose for which it is established shall be carried out and then engage itself in an activity for profit in the course of actually carrying out of such purpose and thereby avoid liability to tax. That would be too narrow an interpretation which would defeat the object of introducing the words 'not involving the carrying on of any activity for profit'. We cannot accept such a construction which emasculate these last concluding words and renders them meaningless and ineffectual.
The other interpretation is to see whether the purpose of the trust or institution in fact involves the carrying on of an activity for profit or in other words whether an activity for profit is actually carried on as an integral part of the purpose or to use the words of Chandrachud. J., as he then was, in Dharmodayam's case [1977] 109 ITR 527(SC),'as a matter of advancement of the purpose'. There must be an activity for profit and it must be involved in carrying out the purpose of the trust or institution or to put it differently, it must be carried on in order to advance the purpose or in the course of carrying out the purpose of the trust or institution. It is then that the inhibition of the exclusionary clause would be attracted.
This appears to us to be a more plausible construction which gives meaning and effect to the last concluding words added by the Legislature and we prefer to accept it. Of course, there is one qualification which must be mentioned here and it is that if the constitution of a trust or institution expressly provides that the purpose shall be carried out by engaging in an activity which has a predominant profit motive, as, for example, where the purpose is specifically stated to be promotion of sports by holding cricket matches on commercial lines with a view to making profit, there would be no scope for controversy, because the purpose would, on the face of it, involve carrying on of an activity for profit and it would be non-charitable even though no activity for profit is actually carried on or, in the example given, no cricket matches are in fact organised.
17. The next question would be whether the term "business" and the term "activity for profit" are synonymous and there should be no dispute in that regard that such is the case, in view of the principles enunciated by the Hon'ble Supreme Court in the above-noted case.
18. Before us, for both the sides our attention was invited to the Supreme Court judgment in the case of State of Gujarat v. Raipur Mfg.
Co. Ltd. 19. For the assessee, to impress upon us that the word "business" is a word of indefinite import and in taxing statutes it is used in the sense of an occupation, or profession which occupies the time, attention and labour of a person, normally with the object of making profit, and to regard an activity as business there must be a course of dealings, either actually continued or contemplated to be continued with a profit-motive, and not for sport or pleasure. And for the Revenue, that an activity may not give rise to any profit but still it would be a business activity.
20. We, however, find that the Hon'ble Supreme Court held in the aforesaid case that no singular test is decisive of the intention to carry on the business and all the circumstances and surrounding facts must be closely analysed before coming to a conclusion, whether the intention is to carry on business or not, and here in the present case that precisely is the exercise we are doing.
21. For the assessee, Shri G.C. Sharma, Sr. Advocate extensively referred to earlier pattern of assessments and the outcome emerging from the Tribunal orders and the fact that for the assessment years 1980-81,1981-82 and 1982-83 the Revenue even did not seek reference from the Tribunal orders. He also greatly stressed on the Memorandum and Articles of Association and the principles reiterated and laid down by the Hon'ble Supreme Court in Surat Art Silk Case, viz-a-viz, the intention and motive of the person. Shri Sharma also laid great stress on clause 26 of the Memorandum of Association to which we have already adverted to in this order above. He also submitted that though in the earlier orders the basis was that no business was contemplated or said to be carried on by the Society, but it should be settled once for all so that assessee is not put to repeated litigation. However, that is one aspect where we cannot possibly bind the Revenue or the assessee for all times to come, the principle of res judicata being not applicable to the taxing statutes.
22. For the Revenue Shri Durgesh Shankar submitted that the word "business" being of widest import, the final fact finding body, like the Tribunal should look behind the curtain and in the earlier years the primary reason, which prompted the Tribunal to hold in favour of the assessee was that income, if any, was applied for the objects of the Society and, therefore, there was no occasion to closely consider whether any business activity was involved. The point sought to be made out by him was that even if there had been business in the earlier years but if the income was applied for the objects of the Trust, the assessee could not be denied exemption but Section 11(4A) made all the difference.
23. Mr. Durgesh Shankar next submitted that for business motivation was not necessary, as even an mountaineering adventure-could be considered as business. Next he submitted that in the earlier years the Tribunal was misled by the assessee by pleading that the element of profit was necessary ingredient of a business. We do not have to say much to reject such contention as completely devoid of merit, because there could be no question of the Tribunal being misled, particularly on a question of law, and to repeat, when the Revenue had not even sought references for the earlier years.
24. Next Shri Durgesh Shankar referred us to the Finance Minister's speech while introducing Finance Bill of 1983 and sought to draw support from the statement that some trust carried on business on commercial lines and derived income therefrom and there was no reason why such business income should not be brought to tax and the proposal was that business income of all charitable and religious trusts would be subjected to tax. His contention was that even if it could be said that the assessee applied its income for its objects which were of charitable in nature, but still there could be no exemption available in relation to business income as such. Next, he referred us to the income and expenditure account and wanted us to draw inference therefrom that activities were commercial in nature. Lastly, the Sr.
Departmental Representative wanted us to take close notice of the Supreme Court judgment in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148/22 Taxman 11. We, however, consider the said judgment as of no relevance to the present case because colourable device, if any, could be said to be in relation to payments of remuneration to Dr. Jagjit Singh and his relatives, which issue having been decided by the CIT(A) in assessee's favour, no question is raised regarding that by the Revenue before us. We have already referred to this aspect in our order above.
25. Mr. G.C. Sharma in rejoinder very fairly submitted that if the Tribunal was to hold that the predominant object of the society was to earn profits, it would certainly be taxable, but if the decision is to be that the Society did no business as such it would be immaterial if there were some surplus receipts or deficits, which would be necessary ingredient because of the peculiar nature of the objects of the Trust and for which accepting subscription and consultancy fees was necessary corollary, because the object was to promote and encourage an object of public utility, like marketing management.
26. We have not only recorded the arguments of the parties above but have expressed our views and decisions also at various places and being of the considered view that there was no change at all in the activities carried on by the Trust, which were in terms held to be of non-business nature, we find no occasion to depart from such thinking.
On the contrary we hold that after careful thought and considering the circumstances and the pattern of activities in the present year and the earlier years, it must necessarily be held that there was no activity which could be termed as business activity indulged by the Society.
Therefore, we hold that the assessee was entitled to total exemption under Section 11 of the Income-tax Act, 1961 and the insertion of Section 11 (4A) and amendment of Section 2(15) did not affect the assessee's case in any manner.
27. Since the assessee succeeds in its primary contention, we are not adjudicating the other issues regarding the computation of income etc.