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TMI Blog1996 (4) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... on 25 of the Companies Act, 1956 set up for promoting export of garments from India with approval of the Central Goverment. The Council is registered under section 12A(a) of Income-tax Act with the Commissioner of Income-tax as a non-profit Charitable Institution. It was allowed exemption under section 11 of the Income-tax Act till the assessment year 1991-92. The Council was set up with following main objects :--- (1) To promote, advance, increase, develop export of all types of readymade garments, excluding, woollen knitwear and garments of leather, jute and hemp. (2) To undertake all export promotion measures, particularly, to undertake market research, quota distribution and allocation, to find out the tariff and other restrictive practices of importing countries, to find out the product range and export prices of garments of other countries, to develop new designs and patterns of garments, to undertake marketing in individual foreign markets, to send trade delegations and missions to foreign countries as well as to survey export potential of readymade garments from the country. (3) To appoint representative, agents or correspondents in foreign markets for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any persons claiming through any one or more of them. (3) Except with the previous approval of the Central Government, no remuneration or other benefit in money or money's worth shall be given by the Council to any of its Members (whether officers or servants of the Council or not) except, payment of out-of-pocket expenses, reasonable and proper interest on money lent or reasonable and proper rent on premises let to the Council. (4) Except with the previous approval of the Central Government, no Member shall be appointed to any office under the Council which is remunerated by salary, fees or in any other manner, not excepted, by sub-clause (3) above. (5) Nothing in this clause shall prevent the payment by the council in good faith of reasonable remuneration to any of its officers or servants (not being Members) or to any other person (not being Member) in return for any services actually rendered to the Council. 3. The Memorandum and Article of Association of Council also provide for enrolment and registration of members and payment of membership subscription and entrance fees. Article 47 of the Memorandum read with article 45 provides for election and composition of Execu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT dated27-9-1985in ITA No. 2765 /Del/84 in the case of the assessee for the assessment year 1980-81. The learned Members had held similar receipt to be of capital nature. The learned CIT(A) considered above order in the light of letter of Council datedSeptember 21,1994and concluded that as per Council's admission, benefit accruing to its Members was of temporary nature. The membership was to cease if annual subscription was not paid. Having regard to above admission, he held that admission fees was not of capital nature. He further noted that the Assessing Officer had not added sum of Rs. 9,250 in respect of admission fees due from 37 members. The said admission fees, according to the learned CIT(A) was assessable under mercantile system of accounting regularly followed by the assessee. The CIT(A) accordingly issued show-cause notice to the assessee as to why said sum of Rs. 9,250 should not be added in the income of the assessee under section 251(2) of the Income-tax Act. After considering objections of the assessee, above amount was added. While treating Entrance/Admission fees as taxable receipt, the learned CIT(A) looked into memorandum and article of association of the Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r performance of contract, it received earnest money which is forfeited in case the fixed quota is not exported. Huge amount is collected towards advances from members. Bulk of earnest money deposited was being forfeited. Every service rendered by the Council was for a fixed fees. The learned CIT(A) refer-red to Annual Report for assessment year 1990-91 according to which members were getting personal favour for granting quotas in the eyes of the Government. In fact, the Council existed for the benefit of foreign jaunts and few influential members. The Council has been acting as a law up to itself. The learned CIT(A) called the Council a trade association. In his view on account of decision in the case of Addl. CIT v. Ahmedabad Mill Owners Association [1977] 106 ITR 725 (Guj.), the Council was not a charitable trust as it was existing for the benefit of fluctuating body of private individual. The CIT(A) further relied upon decision in the case of Calcutta Stock Exchange Association Ltd v. CIT [1956] 29 ITR 687 (Cal.) and held that the fees was charged for specific services and, therefore, receipt was liable to be taxed. Reference was also made to decision of Hon'able Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subscriber members when exports fromIndiawere only Rs. 250 crores. Total membership during the year under consideration rose to 18, 311 with members coming from all parts ofIndiawith total export increasing to Rs. 4,639 crores which presently stands at Rs. 15,000 crores. The Executive Committee which controls day-to-day activities of the Council is elected democratically by its members with Chief Executive (Director General) nominated by the Government. The Council is not a trading association as it does not carry any trading activity whatsoever but is working for promotion and protection of export relating to readymade garments. No profit, surplus or any remuneration or benefit is payable or distributable to the members. With reference to specific additions the appellant submitted as under : (1) Charging of entrance fees of Rs. 8,57,000. The Entrance Fees charged by the Council from its members is claimed to be not taxable on the following grounds : (a) The Council is a mutual trade association and entrance fees is not charged for any specific service performed for members. The privilege enjoyed by the members is not a tenable endeavouring benefit. (b) The Council is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. No amount has been deposited in any personal account. It is further affirmed that there is no admission in annual report for 1990-91 that members were receiving personal favours for grant of quotas. Allegations made by the CIT(A) are denied and it is stated that annual report has been misinterpreted by learned CIT(A). Admission fee received from members is not liable to be taxed as income as per section 2(24)(v) and section 28(iii) of Income-tax Act as forfeited amount was not received from members for any specific service. Recovcry of penalty from defaulting members in contravention of quota policy of the Government of India cannot be held to be income in the commercial sense. Every amount received cannot be held to be taxable income. (3) DENIAL OF EXEMPTION UNDER SECTION 11 OF INCOME-TAX ACT. The assessee has emphasised that it is registered under section 12A of Income-tax Act as a non-profit charitable institution and was allowed exemption since inception from assessment years 1979-80 to 1990-91. The departure made by the Revenue and denial of exemption under section 11 by applying provisions of section 11(4A) read with section 28(iii) is totally untenable. The Coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal was stated to be consequential. 11. Shri Rajindra appearing for the Revenue vehemently opposed above submissions advanced on behalf of the assessee. He placed strong reliance on observation of CIT(A) in the impugned order. With regard to chargeability of entrance fees, it was submitted that before the CIT(A) the assessee had relied upon decision of ITAT for assessment year 1981-82 but its own letter dated13-10-1994showed that members were not getting any endeavouring benefit from membership. The assessee thus contradicted itself. With reference to Assessment Year 1980-81 it was submitted that in that year the CIT(A), as would be evident from para 9 of his order, confused entrance fees with subscription. While before the Hon'ble Supreme Court in the case of Surat Art Silk Cloth Mfgs. Association, the Department had conceded that the subscription was not taxable, the CIT(A) in the order for assessment year 1980-81 held subscription to be taxable as having nexus with services rendered by the Council. He, however, held Entrance Fees to be exempt. Shri Rajindra submitted that admission fees was quite a recurring affair as large number of members (3,465 in this period) wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount cannot be presumed to be an expenditure. In rebuttal Shri S.P. Puri again addressed lengthy arguments both orally and in writing. 13. We have given careful thought to rival submissions of parties and examined relevant material available on record. The first and foremost important question that arises for consideration is whether the assessee is entitled to exemption under section 11 of the Income-tax Act as a public charitable institution. The Council as a non-profit company is registered under section 25 of the Companies Act with approval of the Central Government for the promotion of export of readymade garments fromIndia. It is also registered under section 12A of the Income-tax Act with the Commissioner of Income-tax,New Delhias a non-profitable charitable institution. The Council was allowed exemption from its inception since 1979-80 to 1990-91 and there has been neither any change in its activities nor in its objects. While denying exemption to the assessee in the year under consideration ; the learned tax authorities have held that activities of the appellant are of commercial nature as it is holding fashion shows, seminars, workshops, etc., for a fee. It is charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various categories and also the earnest money deposit or guarantees to be obtained from the exporters subject to which export quota of garments is allotted and in case of infringement of conditions of allotment, the extent of forfeiture of earnest money or invoking of bank guarantee is provided (para 16 page 19 of Annexure - VIII). Reference is invited to notification order issued by Ministry of Textiles, Government of India dated29-8-1989constituting a committee to administer the Earnest Money forfeited deposited in Public Deposit Account. Since the demand from exporters for allotment of quota for each item of export (Fast moving items) exceeds the quota made available by that Country for the particular readymade garment items, the allotment of quota is regulated under the Allotment Policy of the Government of India so that the quota allotted is fully utilised by exporters with maximum foreign exchange earnings by the Country. If the exporter exports less than 100% but more than 7596 of allotted quota, proportionate security deposit is liable to be forfeited and if it is less than 75%, the entire earnest money is forfeited. The forfeiture has been stipulated by Government because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Central Government. Shri Rajindra laid considerable emphasis on the fact that interest earned on forfeited amount was admitted by the assessee to be its income by not challenging order of CIT(A) on this point. The interest was earned by the Council as there was time lag between recovery of amount as earnest money and final order of forfeiture. The Council further delayed deposit of forfeited amount in Public Deposit account and thereby earned interest. Thus interest was realised by use/misuse of forfeited amount by the Council. In the above circumstances, interest may or may not be Council's income. We are not concerned with that question as the same is not an issue before us. But on account of assessment of interest, the forfeited amount cannot be treated as property of the assessee. On material on record, we have to hold that it belonged to and was collected as per the policy of the Central Government. It is not the income of the assessee although as noted earlier, collection of forfeited amount is one of the activities carried on by the assessee relating to distribution of quota. 17. The learned revenue authorities in holding that assessee was not a charitable institution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose who engaged in trading, commerce and industry but on that account the purpose was not rendered any less an object of general public utility. In the case of CIT v. Bar Council of Maharashtra [1981] 130 ITR 28 (SC), above principles were reiterated in the following words :--- " And applying these tests, trading bodies like Andhra Chamber of Commerce and Surat Silk Cloth Manufacturers Association have been held to be institutions constituted with a view to advance an object of general public utility because their primary or dominant purpose was to promote and protect industry, trade and commerce either generally or in certain commodities, even though some benefit through some of their activities did accrue to their members which was regarded as incidental and this court held that the income derived from diverse sources by these institutions (rental income from property in the case of Andhra Chamber of Commerce and income from annual subscriptions collected from its members and commission of a certain percentage of the value of licences for import of foreign yarn and quotas for purchase of indigenous yarn obtained by the assessee from its members in the case of Surat Art Silk C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on on business principles. If an activity is carried on on business principles, it would usually result in profit, but, as pointed out by this court in Surat Act Silk Cloth manufacturers Association's case (1980) 120 ITH 1 (SC), it is not possible to carry on a charitable activity in such a way that the expenditure balances the income and there is no resultant profit, for, to achieve this, would not only be difficult to practical realisation but would reflect unsound principles of management. What section 22, therefore, does when it states that it shall be the general principle of a road transport corporation that in carrying on its undertakings it shall act on business principles is to emphasise the objects set out in section 3 for which a road transport corporation is established and to prescribe the manner in which the general duty of the corporation set out in section 18 is to be performed. It is now firmly established by the decision of this court in Surat Art Silk Cloth Manufacturers Association's case (1980) 121 ITR 1 (SC) and Bar Council of Maharashtra's case (1981) 130 ITR 28 (SC), that the test is " what is the predominant object of the activity - whether it is to carry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom material on record that all activities of the assessee are directed towards achieving its main object of promoting export on readymade garments fromIndia. It did not carry any activity for earning profit and, therefore, it has to be held that the assessee did not carry on " business " as the term is understood in common parlance. The assessee, therefore, is a public charitable institute. For the purpose of granting exemption, the dominant or main object is to be seen. Even if it is found that at some point of time the persons at the helm of affairs did not observe rules and acted in a manner not authorised by rules that would not make any difference to the claim of the assessee. A breach of a duty by public or private holder of an office cannot change the character of office or institution. Thus even if it is proved that certain favours were done by the Executive Committee in allotment of quota that would not make the assessee a non-charitable institution. For all the above reasons, we hold that assessee is a charitable institution to which provisions of section 11 are applicable. The provisions of section 28(iii) or of section 11(4A) are not applicable to this case as the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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