1974 (11) TMI 1 - SC - Income Tax

Whether the income derived by the respondent, Indian Sugar Mills Association, from its sugar export division is exempt from tax under section 4(3)(i) - Whether on a proper construction of the rules and regulations of the association, the Tribunal was justified in holding that the income of the association derived from the business of export of sugar and interest from current and fixed deposits were not exempt u/s 4(3) - question is answered in favour of the revenue

Issues Involved:
1. Whether the income derived by the respondent from its sugar export division is exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922.

Issue-wise Detailed Analysis:

1. Nature of the Association and Its Objects:
The Indian Sugar Mills Association, referred to as "the Association," is a trade union registered under the Trade Unions Act, 1926. Rule 3 of the association's rules outlines its primary objectives, specifically:
- Rule 3(a): To promote and protect the trade, commerce, and industries of India, particularly those connected with sugar.
- Rule 3(b): To encourage friendly relations among sugar mills, producers, distributors, and others involved in the sugar industry.

2. Claim for Tax Exemption:
The Association claimed that its income from the sugar export division was exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922, which exempts income held for charitable purposes. The term "charitable purposes" includes relief of the poor, education, medical relief, and advancement of any other object of general public utility.

3. Application of Funds:
Rule 4(a) of the association's rules stipulates that the income and property of the association should be applied solely towards promoting its objectives and not be distributed as profit to its members. However, Rule 64 permits the distribution of profits among members if sanctioned by a resolution at a general meeting, introducing an element of private gain.

4. Decisions by Tax Authorities:
The Income-tax Officer, the Appellate Assistant Commissioner, and the Tribunal rejected the Association's claim for exemption. The Tribunal referred the question to the High Court, which ruled in favor of the Association, stating that its income was held for charitable purposes.

5. High Court's Rationale:
The High Court relied on principles from previous cases, such as In re Trustees of the Tribune and All India Spinners' Association v. Commissioner of Income-tax, which emphasized that objects of general public utility should be assessed based on local customary law and common opinion. The High Court also referred to Commissioner of Income-tax v. Andhra Chamber of Commerce, which held that promoting trade, commerce, and industry for economic prosperity benefits the entire community and is an object of general public utility.

6. Supreme Court's Analysis:
The Supreme Court examined whether the Association's income was held wholly for charitable purposes. It found that Rule 64, which allows profit distribution among members, contradicts the claim of holding income for charitable purposes. The Court noted that the association's rules, including those related to regulating employment terms and promoting employer-employee relations, are primary purposes of a trade union and not charitable purposes.

7. Conclusion:
The Supreme Court concluded that the Association did not hold its income wholly for charitable purposes due to the potential for profit distribution among members as allowed by Rule 64. This element of private gain is inconsistent with the object of general public utility. Therefore, the Association's income from the sugar export division is not exempt from tax under section 4(3)(i) of the Indian Income-tax Act, 1922.

Judgment:
The appeals were allowed, the High Court's answer was discharged, and the question was answered in the affirmative in favor of the revenue. The appellant was entitled to costs in both the Supreme Court and the High Court.

Appeals allowed.

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