Director of Income-tax (Exemptions) Vs. Bharat Diamond Bourse - Court Judgment

1. On March 21, 2000, the appeal reached final hearing. After hearing the advocates, the following order is passed.

'For reasons to be given separately, the appeal stands dismissed.'

2. We now proceed to give reasons.

3. Two questions arise for determination in this appeal.

'(a) Whether the assessee was entitled to exemption under Section 11 of the Income-tax Act, 1961 ?

(b) If the first point is answered in the affirmative then, whether the assessee lost the exemption by giving' Rs. 70 lakhs during the previous year relevant to the assessment year 1989-90 to Bharat Shah (a member of the petitioner-bourse) In other words, whether the assessee lost its-exemption on account of contravention mentioned in Section 13(2){a) of the Income-tax Act, 1961 ?'

4. The facts giving rise to this appeal, briefly, are as follows. The assessee-company filed its return of income on December 20, 1990, along with audited income and expenditure account and balance-sheet for the assessment years 1989-90 and 1990-91. The benefit of Section 11 was denied by the Assessing Officer. The matter was carried in appeal. The appellate authority confirmed the order of the Assessing Officer. Being aggrieved, the matter was carried in appeal to the Tribunal. The Tribunal came to the conclusion that the objects were of charitable nature ; that the assessee satisfied the definition of the words 'charitable purpose' under Section 2(15) of the Act ; that there was no breach under Section 13(2)(a). Hence, this appeal is by the Department. On the first point, the only contention advanced on behalf of the Revenue was that there was no restriction nor obligation created to spend the money exclusively and essentially on charity. That, this point has not been considered by the Tribunal. In this connection, reliance was placed by the Department on the judgment of the Supreme Court in the case of Delhi Stock Exchange Association Ltd. v. CIT : [1997]225ITR235(SC) , as also the judgment of the Patna High Court in the case of Bihar State Forest Development Corporation v. CIT : [1997]224ITR757(Patna) . In the memo of appeal, it is alleged by the appellant that the dominant object of the assessee was non-charitable and that the activities of the assessee did not benefit the public, but benefited only a Section of the trade or specified traders in diamonds and gems. It was accordingly urged that in the circumstances, the judgment of the Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association : [1980]121ITR1(SC) has no application to the facts of this case.

5. We do not find any merit in the above contention advanced on behalf of the Revenue. The diamond exporters formed a Diamond Exporters Association Limited for regulation of exports of the diamonds. A need was felt for setting up a diamond bourse in Bombay with customs clearance facility which, in the international market, would facilitate the diamond exports and make the trade more competitive. In 1984, the Central Government accepted the proposal of the association to set up a bourse in Bombay. It was agreed that the MMTC (a Central Government undertaking) will co-ordinate administrative steps and that the bourse was to be named as suggested by the Ministry of Commerce as Bharat Diamond Bourse. Accordingly, the decision to set up the bourse was taken at the level of the Government of India and at the level of the Finance and Commerce Ministries. This was essentially for the purposes of increasing the exports of polished diamonds from India. At this stage, it may be mentioned that the city of Bombay has been traditionally the headquarters of diamond trade and exports. The main business centre is at Opera House in South Bombay. The International Airport is at Sahar, Andheri in North Bombay. To facilitate the customs clearance and to facilitate the transport, it was decided to have the customs clearance facility at Diamond Plaza near Opera House so that the delay on account of congestion in the customs at the airport is avoided. Similarly, the imported diamonds could be cleared expeditiously for home consumption in accordance with the provisions of the Customs Act. Moreover, these diamonds are generally exported or imported in small wrappers. These are precious goods which need to be stored. Therefore, it was decided that in the said bourse, a storage facility would also be provided- On August 14, 1984, the MMTC requested the Registrar of Companies to issue a certificate of incorporation under the Companies Act. This was done on August 18, 1984. At this stage, it may be mentioned that under Section 8 of the Customs Act, the Collector of Customs is empowered to approve a proper place in any customs port or customs airport, for loading and unloading of goods or for any class of goods. Similarly, under Section 45 of the Customs Act, all imported goods unloaded in the customs area remain in the custody of such person as may be approved by the Collector of Customs until they are cleared for home consumption or are warehoused or are transhipped. Such person, having the custody of imported goods in a customs area, is required to maintain a record of such goods and shall not permit such goods to be removed from the customs except in accordance with the permission of the proper officer. Accordingly, on November 22, 1984, the Collector issued a notification under Section 8 of the Customs Act, approving the premises of the MMTC situate at Diamond Plaza Building near Opera House as a customs area 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 the said goods until they are cleared in accordance with the provisions of the Customs Act. By the said notification, it was further specified that the MMTC will also be the custodian with regard to the export cargo until they are transhipped and handed over to the airlines at Sahar International Airport, Bombay. One more point needs to be mentioned. In 1984, when the MMTC was appointed as the custodian, it had incurred expenditure on behalf of Bharat Diamond Bourse. The said expenditure was of Rs. 81 lakhs (approx.) for setting up the bourse. On August 31, 1984, the managing committee of the assessee resolved that the expenses incurred by the MMTC shall be treated as a loan given by the MMTC to the bourse. The loan was to carry interest at 6 per cent, per annum. The MMTC had taken on sub-lease, the second floor of the building known as Diamond Plaza for five years at the rent of Rs. 86,720 per month and had deposited Rs. 52.03 lakhs refundable on the expiry of the lease. The MMTC sub-leased the premises to the assessee on the same terms and conditions, except for the deposit. These facts are essential to indicate that the bourse was funded by the MMTC, a Government of India undertaking. The object was to facilitate export of diamonds so that maximum revenue could be earned by way of foreign exchange and also to make the trade more competitive at the international level. On December 15, 1986, an agreement was arrived at between the MMTC and the assessee under which it was agreed that from April 1, 1988, service charges will be collected by the assessee and not by the MMTC and that from that date, the bourse shall meet its own obligations towards its staff, their expenses, etc. Under the said agreement, the operation of the bourse was taken over by the assessee from the MMTC. As a result of setting up of the bourse, the total value of the parcels cleared through the bourse increased from Rs. 2,231 crores in 1985-86 to Rs. 11,261 crores in the year 1991-92. Similarly, figures relating to diamonds (excluding re-export of rough diamonds), increased from Rs. 7,226 crores in 1988-89 to Rs. 10,751 crores in 1991-92. Similarly, out of the total export of gems and jewellery from India including from SEEPZ during 1991-92, 90 per cent, has been made through the assessee. With regard to diamonds, 99 per cent, has been routed through the assessee. These figures indicate how the export turnover increased during the relevant period and how the country has benefitted by earning foreign exchange and, therefore, we are of the view that running of the assessee-bourse was an object of general public utility. A separate income and expenditure account has been maintained by the assessee. In this account, service charges, demurrage charges, subscription and other miscellaneous income have been credited and the expenses have been debited. The net amount is transferred to the consolidated income and expenditure account of the diamond bourse. With regard to the expenses, it may be mentioned that before the diamonds are transhipped to Sahar International Airport in North Bombay, the diamonds are examined by the customs officials, who are stationed in the premises of the assessee. A detailed procedure has also been laid down for assessment of the goods by the customs authorities. A detailed procedure is also laid down for taking delivery of the imported diamonds. For this purpose, a storage facility is also provided in the stock bourse. As stated herein-above, the very nature of the above activity requires diamonds which are put in small wrappers to be kept in a safe place. Therefore, lockers are also provided in the strong room only to facilitate the export of diamonds. It may be clarified that the locker facility is available to members. It is not a regular service provided by the assessee in the sense that no member can claim such services as of right. The locker fees charged were incidental to the main customs clearance activity. It may also be mentioned that the general facility enabling export of diamonds is available to members as well as non-members. The very procedure relating to import and export of diamonds involves storage of diamonds in the locker before they are transhipped to Sahar International Airport. The expenses which are debited include those incurred in respect of the Customs Department, transport charges, security charges and rent for the premises. For the security of diamonds, police authorities patrolled the area. They are provided with a jeep. The expenses of the jeep and the security are also paid by the assessee. The customs authorities are stationed in the premises of the assessee. Their expenses are also borne by the assessee. The staff salaries are paid to the customs authority on cost recovery basis. As regards the application of income to the objects of the assessee are concerned, it may be mentioned that the assessee has reduced the service charges per parcel. That the assessee has provided more time to the importers to clear the goods without incurring demurrage charges. Hence, it cannot be stated that the main object of the bourse is to make profit as alleged by the Department. The Tribunal has rightly come to the conclusion that the objects of the assessee are charitable and that the application of income has been for such purposes.

6. On behalf of the Revenue it was contended that the Tribunal has lost sight of the fact that there was no restriction on the manner in which the income accruing to the assessee would be spent. In this connection reliance was placed on the judgment of the Supreme Court in the case of Delhi Stock Exchange Association Ltd. v. CIT [ : [1997]225ITR235(SC) as also on the judgment of the Patna High Court in the case of Bihar State Forest Development Corporation v. CIT : [1997]224ITR757(Patna) . We do not find any merit in the said contention. The Tribunal has specifically referred to the memorandum of association as well as articles of association in which it has been mentioned that the subscribers are desirous of being formed into a company not for profit. That the said memorandum clearly indicated that the assessee did not exist for the purposes of profit. That under the memorandum of association, it has been laid down that the income shall be applied solely for the promotion of its objects and no portion of the income shall be paid directly or indirectly by way of dividend, bonus or profit to the members of the assessee. That no remuneration or other benefits shall be given to any of the members whether they are officers or servants except with the prior approval of the Central Government. Accordingly, the Tribunal concluded that there was a restriction on the manner of spending the income accruing' to the assessee. In the case of Delhi Stock Exchange : [1997]225ITR235(SC) , it was found on the facts that till December, 1973, there was no prohibition on the assessee regarding' distribution of profits as interests or dividends. That in December, 1973, the articles of association were amended to prohibit the distribution of profits. In the circumstances, the Supreme Court confirming the judgment of the High Court held that at the relevant period there was no obligation on the assessee to use the income exclusively for charitable purposes. Hence, the judgment of the Supreme Court has no application to the facts of this case. In the case of Bihar State Forest Development Corporation : [1997]224ITR757(Patna) , on an examination of the memorandum and articles of association, the Division Bench of the Patna High Court found that certain objects with which the assessee was incorporated were of general public utility, viz., for development of forestry. However, it was found that there were other objects as well which made the assessee a commercial organisation with no restriction as to how its income should be utilised. In the present matter, the Tribunal has examined the objects of the assessee-company and has concluded that none of the objects could be said to be non-charitable. The Tribunal found that the assessee was a company. Its objects were to promote commerce and trade. Its objects were to earn valuable foreign exchange and, therefore, the said objects were objects of general public utility within the meaning of Section 2(15) of the Income-tax Act. The Tribunal has rightly placed reliance on the judgment of the Supreme Court in the case of Addl. CIT v. Surat Art Silk Cloth Manufacturers Association : [1980]121ITR1(SC) . Before concluding, we may mention that the Indian economy is a cost push economy. One of the modes of reducing fiscal deficit is to introduce competitiveness in the economy. Being a cost push economy, in order to make the exports more competitive in the international market, the cost component is required to be reduced. This purpose is achieved by setting up a bourse with customs clearance facility. One cannot lose sight of the fact that on account of congestion in the customs clearance, there is delay which leads to increase in costs. So also, precious stones, diamonds and gems are put in small wrappers which are required to be stored in a proper place before they are transhipped. All these factors lead to increase in costs and to avoid delay and increase in demurrage charges, the said bourse was set up through the Government agency, viz., the MMTC, before 1988. Hence, we are of the view that the pre-dominant activity was the promotion of trade which was an object of general public utility within the meaning of Section 2(15) of the Income-tax Act. Hence, the first point is answered in the affirmative and in favour of the assessee.

7. Now coming to the second point mentioned hereinabove, it may be mentioned that the bourse at Diamond Plaza was initially located in an area admeasuring 5,400 sq. ft. including customs area. By 1988, 400 parcels of diamonds were examined every day by six customs officers and the back-up staff. Hence, shortage of accommodation was soon felt and, therefore, it was felt that an area of 12,000 sq. ft. on a single floor would be ideal. A building was coming up near Nana Chowk (also close to Opera House) called Diamond Village. It was, therefore, decided to explore the possibility of getting the requisite area in the said building. Accordingly, on February 11, 1988, the managing committee resolved to acquire additional space, and a sub-committee of four persons was formed to select alternate accommodation of 12,000 sq. ft. On April 27, 1988, the Vice President of the assessee informed Shri Bharat Shah (a member of the asses-see) to negotiate on behalf of the assessee with the builders of Diamond Village. It was agreed that the assessee would provide Rs. 70 lakhs to Bharat Shah as deposit to purchase the premises in the Diamond Village. This was in view of the fact that the building was under construction. That the assessee felt that it would be risky to give Rs. 70 lakhs as deposit to the builders. That it would be safer to give the said amount to Bharat Shah, who was a member of the assessee. Ultimately, the transaction did not go through. Ultimately, the said amount has been returned by the member to the assessee. In the circumstances, the Tribunal has come to the conclusion that the said sum of Rs. 70 lakhs was never lent by the assessee to Bharat Shah and, therefore, Section 13(2)(a) of the Income-tax Act did not apply to the facts of this case. The Tribunal also found that Bharat Shah was only a member of the bourse. The Tribunal found that he was one of the subscribers to the articles of association of the assessee, which is an incorporated company under Section 25 of the Companies Act. Hence, he was neither a founder nor a trustee as contended by the Department. Hence, Bharat Shah did not fall under Section 13(2)(a) or under Section 13(2)(c). The Tribunal found that Bharat Shah was known to the builders of Diamond Village and, therefore, he was appointed as a negotiator by the assessee to get space in the building at Diamond Village. Therefore, the amount was given to him for a particular purpose. There was no lending of money by the assessee to Mr. Bharat Shah. We agree with the finding of facts recorded by the Tribunal. Accordingly, the appeal stands dismissed. No order as to costs.