1936 (4) TMI 11 - HC - Income Tax

Summary

Issues Involved:

1. Liability of an association incorporated under Section 26 of the Indian Companies Act to income tax.
2. Nature of income derived from members and its taxability.
3. Applicability of exemption under Section 4(3)(ii) of the Indian Income Tax Act for charitable institutions.
4. Taxability of expenditure on charity.

Issue-wise Detailed Analysis:

1. Liability of an Association Incorporated under Section 26 of the Indian Companies Act to Income Tax:

The court examined whether an association incorporated under Section 26 of the Indian Companies Act, limited by guarantee and not existing for earning profits, is liable to income tax. The court found no provision in the Income Tax Act that exempts such an association from being assessed to income tax. The court noted that the assessee had admitted before the Income Tax Officer that it is not exempt from assessment as it is a company registered under the Indian Companies Act and falls within the scope of Section 3 of the Income Tax Act. Consequently, the court agreed with the Income Tax Commissioner that there is no exemption for such a company and the non-applicability of Section 48 of the Act is irrelevant.

2. Nature of Income Derived from Members and Its Taxability:

The court differentiated between income derived from members on their own account and income derived from outsiders through members. The assessee argued that it is a "mutual concern" where members contribute to a common fund for mutual benefit and such contributions are not "income, profits or gains" under the Act. The court referred to various cases, including the New York Life Insurance Company v. Styles and The United Service Club, Simla v. The Crown, which supported the view that contributions by members for mutual benefit are not taxable as income. However, the court also noted the case of Liverpool Corn Trade Association v. Monks, where profits from dealings with members were considered taxable. The Income Tax Commissioner conceded that the income from commission and registration fees is not income from "business" within the meaning of the Act, and the court held that such payments are not taxable as income from "other sources."

3. Applicability of Exemption under Section 4(3)(ii) of the Indian Income Tax Act for Charitable Institutions:

The court considered whether the income of the Chamber of Commerce could be deemed as income of a charitable institution derived from voluntary contributions and applicable solely to charitable purposes. The court noted that "charitable purpose" includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility. However, the court found that the primary object of the association was to provide trade facilities and improve business, which does not qualify as a charitable purpose. The court also emphasized that a charitable institution must have an element of altruism, which was lacking in this case since the beneficiaries were the members themselves. Therefore, the court held that the assessee is not a "charitable institution" within the meaning of the Act and is not exempt from tax.

4. Taxability of Expenditure on Charity:

The court addressed whether the expenditure on charity, even prior to the amendment of the memorandum of association, is liable to assessment. The court noted that the assessee cannot claim exemption for any money it elected to spend on charity apart from other considerations. Therefore, the court answered this question in the affirmative, indicating that such expenditure is taxable.

Conclusion:

The court provided the following answers to the questions referred by the Income Tax Commissioner:

1. The association is liable to assessment under the Income Tax Act.
2. Payments made by members are not income from any sources other than business.
3. The association is not a charitable institution within the meaning of the Act and is not exempt from tax.
4. Expenditure on charity is liable to assessment.

The court ordered that the assessee will receive costs from the department and is entitled to recover counsel's fee according to the certificate filed. The judgment was to be sent to the Commissioner of Income Tax, and the reference was answered accordingly.