1997 (3) TMI 11 - SC - Income Tax

Whether the assessee is entitled to claim exemption in payment of income-tax under section 11 of the Income-tax Act, 1961 (hereinafter referred to as the Act ), for the reason that the income of the assessee was derived from property held under trust for charitable purposes - Held, no

Summary

Issues:
- Entitlement to claim exemption under section 11 of the Income-tax Act, 1961 for income derived from property held under trust for charitable purposes.

Detailed Analysis:
The appeals revolve around the question of whether the Delhi Stock Exchange Association Ltd. is eligible for income tax exemption under section 11 of the Income-tax Act, 1961, based on the argument that its income was derived from property held under trust for charitable purposes. The company, incorporated in 1947, primarily operated as a stock exchange, generating income through membership fees, property rent, and interest on securities. The Income-tax Officer, Appellate Assistant Commissioner, and Income-tax Appellate Tribunal all rejected the claim for exemption, emphasizing that while the stock exchange served a public utility purpose, its surplus income was not exclusively designated for charitable use. The Tribunal highlighted a previous court judgment that indicated the company's surplus could benefit shareholders or employees, undermining its charitable trust status.

The High Court upheld the Tribunal's decision, noting that until December 1973, the company had the discretion to distribute profits as dividends and was not legally bound to allocate income solely for charitable purposes. The court highlighted an amendment in December 1973 that restricted profit distribution, but prior to this change, the company had full autonomy over profit utilization. The court dismissed the significance of the company not distributing dividends, emphasizing the absence of a legal obligation to dedicate profits exclusively to charitable activities.

Counsel for the company argued that the overall nature of the company's activities, coupled with the absence of dividend distribution, should qualify its income as derived from charitable trust property. The counsel referenced government objections to certain practices and a previous court ruling to support the company's position. However, the court cited a precedent involving a road transport corporation to emphasize the importance of a legal obligation to exclusively allocate profits for charitable purposes, which was lacking in the case of the stock exchange company.

The court also addressed the Securities Contracts (Regulation) Act, 1956, clarifying that while it regulated stock exchanges, it did not impose restrictions on profit distribution. Similarly, government letters advising against certain practices were deemed non-binding in terms of profit distribution. Ultimately, the court dismissed the appeals, affirming the lower courts' decisions and denying the company's claim for exemption under section 11 of the Income-tax Act, 1961.