1994 (10) TMI 112 - AT - Income Tax

Assessing Officer, Business Income, Charitable Or Religious Trust, General Public Utility, Income From Property

Summary

Issues Involved:
1. Claim of exemption under section 11 of the Income-tax Act.
2. Applicability of section 11(4A) of the Income-tax Act.
3. Registration under section 12A of the Income-tax Act.
4. Compliance with section 11(2) of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Claim of Exemption under Section 11 of the Income-tax Act:

The primary issue in all appeals was the exemption claimed by the assessee under section 11 of the Income-tax Act. The Income-tax Officer (ITO) rejected the claim for the assessment year 1987-88, stating that the circumstances were not similar to the Andhra Pradesh Road Transport Corporation case, where the Supreme Court had granted exemption based on the fact that the entire capital was provided by the Government and the income was utilized for public purposes.

The Commissioner of Income-tax (Appeals) accepted the assessee's claim for exemption, stating that the Corporation's purpose was to help the weavers of the State, which is an object of general public utility. The Commissioner noted that no dividends were declared, and there was a commitment that no dividends would be declared, thus supporting the charitable nature of the Corporation.

However, for the assessment year 1988-89, the ITO re-examined the matter and concluded that the activities of the assessee were commercial in nature and aimed at earning profit. The Commissioner (Appeals) upheld this view, stating that the clauses relating to distribution of dividends and assets on winding up were inconsistent with the charitable nature of the Corporation.

The Tribunal agreed with the Commissioner (Appeals) that the character of the Corporation should be determined with reference to its memorandum and articles of association and not the Government order. The Tribunal held that the Corporation was established with the object of promoting and developing the handloom and powerloom industries, which is an object of general public utility. However, the existence of clauses allowing for the declaration of dividends and distribution of assets on winding up did not invalidate the charitable nature of the Corporation.

2. Applicability of Section 11(4A) of the Income-tax Act:

The ITO and the Commissioner (Appeals) for the assessment year 1988-89 held that the assessee was not entitled to exemption under section 11 due to the provisions of section 11(4A), which requires that the business be carried on by the beneficiaries of the institution.

The Tribunal agreed with this view, stating that the weavers were paid wages for their work and were not beneficiaries carrying on the business. The Tribunal noted that the manufacturing expenditure accounted for wages paid to weavers was only a small part of the total manufacturing expenses, and thus the assessee violated the provisions of section 11(4A).

3. Registration under Section 12A of the Income-tax Act:

The Revenue raised an objection that the assessee was not registered under section 12A of the Act. The Tribunal noted that the assessee had made an application for registration, and the Commissioner of Income-tax had condoned the delay and granted registration. Therefore, this was not an impediment to the assessee's claim for exemption.

4. Compliance with Section 11(2) of the Income-tax Act:

The Revenue contended that the assessee had not complied with the provisions of section 11(2), which requires the accumulation of income to be specified and invested in prescribed modes. The Tribunal found that the assessee had applied the income for charitable purposes, meeting the losses of earlier years, and there was no need for accumulation.

Conclusion:

The Tribunal concluded that while the assessee-corporation was a charitable institution as envisaged in section 11, its income from business did not enjoy exemption under section 11 due to non-compliance with section 11(4A). The appeals of the Revenue for the assessment year 1986-87 were allowed, and the cross-objection for the assessment year 1987-88 and the appeals for the assessment years 1988-89 and 1990-91 by the assessee were dismissed.