9911796707
TMI Blog1990 (8) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... Association in clause 3(a). The main objects of the corporation are as follows:- "To engage in, promote, improve, develop, counsel and finance production, purchase, storage, processing, movement, transport, distribution and sale of foodgrains, foodstuffs and any other essential commodities and to articles establish laboratories for the purpose of ensuring quality control, to train personnel in the technique of quality control, and to provide services and assistance of all kinds of the said purchases including capital credit, means resources, technical and managerial services, advice and assistance." There are objects incidental or ancillary to the attainment of the main objects which are set out in clause 3(b) of the Memorandum. The corporation has its own Articles of Association providing for the rules of indoor management. The corporation was floated by an order issued by Government of Andhra Pradesh in G.O. Ms. No. 701 dated 26-7-1974 which is as follows:- "Government of Andhra Pradesh Abstract Companies-Civil Supplies.- Purchase of foodgrains and other essential articles - Formation of the "Andhra Pradesh State Civil Supplies Corporation Private Limited" - Orders - Issued. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Andhra Pradesh High Court which was dismissed - Andhra Pradesh State Civil Supplies Corpn. Ltd. v. CIT [1984] 148 ITR 497. The case is pending before the Supreme Court. For the previous year ending on 30-6-1984 relevant to the assessment year 1985-86, it was contended that the assessee is a charitable institution within the meaning of section 2(15) and section 2(31) of the Income-tax Act, and its income is wholly exempt under the provisions of section 11 of the Act. The Income-tax Officer, for reasons mentioned in the assessment order for the earlier assessment year, held that the assessee was not a charitable institution and had not complied with the conditions laid down under section 11 of the Act and, therefore, brought to tax its income under the provisions of the Income-tax Act. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals.) 4. (a)(i) The first appellate authority accepted the plea of the assessee that the corporation was established for the purpose of advancement of objects of general public utility and its activities are in accordance with the purpose for which it was established; (ii) He also upheld the claim of the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound therein is only of a commercial nature and there is nothing in the main objects to suggest that the corporation was formed to advance any cause of public utility. Merely by dealing in essential commodities, if one were to become charitable institution, every trader in essential commodities either as a wholesaler or retailer or dealer, will have to be held as a charitable institution by himself. This was not the intendment in section 2(15) of the Income-tax Act. He also referred to the objects incidental or ancillary to the attainment of the main objects which are several in number and submitted that all the objects are non-charitable in their import and content. Thus, there was nothing in the main objects or in the ancillary objects which would show that the corporation was established for advancing the case of public good or utility. The first appellate authority made a distinction between the objects and powers and looked beyond the contents of the Memorandum of Association to justify his finding that the corporation was charity within the meaning of section 2(15) of the Act. In particular, he assailed the act of the first appellate authority in having referred to G.O.Ms.No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of private gain which cuts at the very root of charity has not been considered in the proper perspective qua the charity itself. He relied on the decision of the Supreme Court in CIT v. Indian Sugar Mills Association [1974] 97 ITR 486. He further submitted that the decisions relied on by the CIT(A) as found in para 27 of his order are clearly distinguishable. In the case of CIT v. Andhra Pradesh State Road Transport Corpn. [1986] 159 ITR 1/25 Taxman 63A(SC), the objects themselves were predominantly charitable and one need not read between the lines. So also in the other cases. 8. Adverting to clause 28 of the Memorandum of Association, Sri Viswanatham submitted that that clause exposed the real purpose for which the corporation was formed, the real purpose being distribution of dividends. He also referred to the arguments of the learned Chartered Accountant for the assessee in the assessee's appeal to the effect that clause 28 of the Memorandum stood amended by deletion of the provision for distribution of dividends on preference shares or equalisation of dividends, and submitted that the impugned amendment cannot have any retrospective effect but came into force only upon regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of Association to the effect that all income of the corporation would belong to the price equalisation/stabilization fund of the Department of Civil Supplies, Government of Andhra Pradesh, is also of no avail to the assessee in the face of clause 28 of the Memorandum of Association (dealing with the right to create funds for distribution of dividends on preference shares or for equalising the dividends) remaining intact unaltered. He wondered if all the incomes of the corporation belonged to the Civil Supplies Department of Government of Andhra Pradesh, how could there be a provision for distribution of dividends on preference shares or for equalisation of dividends? So it is that notwithstanding the amendment of Article 6 declaring that the entire income of the corporation belonged to the Civil Supplies Department, the company was within its rights to provide for distribution of dividends or for equalisation of dividends. Even assuming that Article No. 6 as altered by the corporation in its resolution dated 15-10-1980 has the effect of making the income of the corporation as only belonging to the Civil Supplies Department, still the Civil Supplies Department cannot claim to hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erspective the legal position as regards the alteration of the Memorandum of Association and erred in holding that clause 28 as it stood before the amendment continued to hold the field until before the registration of the amendment with the Registrar of Companies. The Corporation was promoted by Government of Andhra Pradesh obviously for assisting it in times of difficulties. The corporation is helping the Government in procuring the essential goods and other commodities for distribution among the people of the State and thus assist the Government in holding the price line. It also supplied rice at a fixed price of Rs. 2 per Kg., to people at or below the income of Rs. 6,000 per annum. Helping the Government in the distribution system of essential commodities would certainly be an object of public utility and, therefore, the CIT(A) has rightly held that the assessee was formed for charitable purposes though he erred in holding that the corporation was having provision for distribution of dividends in its Memorandum of Association. He also referred to the decision of the Andhra Pradesh High Court in the case of CIT v. Nehru Pasuvula Santha & Gramabhivrudhi Sangam 1975 Tax LR 246. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments related to the dividends of the earliest preceding years prior to alteration of Articles of Association and no dividend was declared for the year under appeal and, therefore, no adverse inference can be drawn against the assessee. 15. In his reply, Sri Viswanatham referred to the draft proposals for the price equalisation/stabilisation fund of the Civil Supplies Department, Government of Andhra Pradesh and submitted that some of the objects of the proposed fund are to sanction loans to the corporation itself for meeting its capital and revenue financial necessities and to give grants to the corporation for the purpose of construction of buildings etc., and to grant loans to the employees of the corporation. Thus, even if for a moment it is assumed that an overriding title had been created on the income of the corporation by virtue of Article 6, the incomes would be ploughed back to the corporation for its own benefits. Thus, the price equalisation/stabilisation fund ensures for the benefit of the corporation itself and hence there is no charitable element therein. 16. The assessee in its appeal objects to the finding of the CIT(A) that because of clause 28 of the Memorand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 6,000 per annum, also get essential commodities through the fair price shops at reasonable prices at the behest of the corporation. Therefore, it cannot be said that there has been no compliance of the provisions of section 11(4A)(b) of the Income-tax Act. 18. Sri Viswanatham submitted that the corporation has got a distinct and different legal personality of its own and it cannot be equated with the State itself as has been held in the decision of the Andhra Pradesh High Court in assessee's own case in Andhra Pradesh State Civil Supplies Corpn. Ltd.'s case. Neither can the supply of rice at Rs. 2 per Kg., be viewed as an act of charitable dispensation on the part of the corporation, because such supplies were made at the instance of the Government in return for the reimbursement of any loss arising from the supply of subsidised rice including the administrative charges in connection therewith. When the assessee itself is getting substantial subsidy for any loss that might arise in the course of carrying on its trade or business the element of charity, if any, disappears in thin air. It is not possible to identify the beneficiary in the case of corporation of this type and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members; ** ** ** (n) to do all other lawful things as are incidental or conducive to the attainment of the above objects." From a perusal of the objects of the association detailed above barring clause (a) above it would appear prima facie that the objects in clauses "(b) to (e)" are purely commercial in nature without any charitable intendment. However, their Lordships of the Supreme Court by their majority judgment held that the dominant or primary purpose of the assessee was to promote commerce and trade in art silk yarn, raw silk, cotton yarn, art silk cloth, silk cloth and cotton cloth as set out in clause (a) and the objects specified in clauses (b) to (e) were merely powers incidental to the carrying out of that dominant and primary purpose. In the light of this pronouncement of the Supreme Court in the case cited supra, it should not be difficult for us to hold that the predominant objects of the corporation as contained in its Memorandum of Association are charitable in nature. Whether the income of the corporation would be exempt or not is totally a different question and the points involved in taking a decision on that count need not influence us in holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court took the aid of a Government Order which led to the formation of a cooperative society in ascertaining the substance of the matter in Girijan Co-operative Corpn. Ltd. v. CIT [1989] 76 CTR (AP) 44. Similarly, in order to decide the real purpose for which the corporation is formed, it is but necessary to go beyond the Memorandum of Association of the corporation and look into the documents that gave rise to the formation of the institution. It is this G.O. Ms. No. 701 dated 26-7-1974 which gave birth to the corporation and the purpose is stated to be to help the Government meet any difficult situation arising in the procurement, transport, storage and issue activities for essential commodities. The history of the corporation's activities which are reflected in its annual accounts also proves that the corporation was engaging itself in procuring, storing, transporting and arranging for the distribution of essential commodities to the fair price shops. The promoter, which is State of Andhra Pradesh, has a hold on the corporation and in this connection the provisions of clause 122 of the Articles of Association are worth recalling:- "Notwithstanding anything contained in any o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e conclusion that merely because some benefits incidentally arose to the members of the society or institution in the course of carrying out its main charitable purpose, it would not by itself prevent the association or institution from being a charity. It would be a question of fact in each case "whether there is so much personal benefit, intellectual or professional, to the members of the society or body of persons as to be incapable of being disregarded". 23. In the light of the ratio laid down by the highest court of the country in interpreting and elucidating the expression "charitable purposes", we have no hesitation in holding that the corporation, which was formed at the behest of the Government for the purpose of ensuring distribution of essential commodities to the people of the State through the media of fair-price shops at reasonable prices has in its heart and soul the lofty ideals of advancement of public utility. Though much of the litigation could have been avoided if the contents of G.O. Ms. No. 701 had been drafted into the Memorandum of Association as its preamble, there is no gainsaying the real purpose or the predominant motive of the assessee-corporation. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivate gain because profits can be distributed among the shareholders and this provision robbed the corporation of its charitable nature. Sri Anjaneyulu argued that clause 28 of the Memorandum of Association stood amended with effect from 16-11-1981 and, therefore, there was no provision for distribution of dividends. Even if there is any such provision, the only shareholder being the Government, the profits were appropriated only by the Government which cannot be equated with appropriation for private gain. Sri Viswanatham took us through the provisions of sections 17 to 19 of the Companies Act, 1956, (vide para 8 supra). To appreciate his contentions, reference to section 13 is necessary. Section 13 sets out the conditions to be stated in the Memorandum of Association. The main objects and the objects incidental to the attainment of the main objects are one such condition stated in the Memorandum of Association. Any alteration of the conditions stated in the Memorandum of Association as prescribed in section 13 of the Companies Act will be carried out in the following manner:- (a) passing special resolution proposing the alteration; (b) Approval by the Company Law Board of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whether clause 28 of Memorandum of Association stood amended on the date of passing of special resolution or not (upon which much turns), it is necessary for us to examine whether that clause represented an object by itself or merely a power conferred on the assessee-corporation. If it is an object, certainly it would be a condition to be stated in the Memorandum of Association under section 13 of the Companies Act. If it is not, it is not a condition to be stated in the Memorandum of Association according to section 13 of the Companies Act even though it might have been described as an object in the Memorandum of Association. It is not uncommon for the companies to mix both a variety of objects and a catena of powers in the Memorandum of Association and occasions do arise for the courts to distinguish the objects from the powers. This practice of mixing up the objects and the powers is deprecated by the courts as for instance in Nehru Pasuvula Santha & Gramabhivrudhi Sangam's case, in the following words:- "For a proper appreciation of the objects of a trust, it is necessary that one should draw a line of distinction between what are the objects of the trust and what are the pow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to a dividend to be inserted in the Memorandum of Association of a company nor is there any other provision in the Act which enjoins that the right to receive dividends for a class of shares is one which should be inserted in the Memorandum." Therefore, the court concluded that "it is clear that the clause in the nature of clause 5 with which we are concerned in this application cannot be regarded as condition within the meaning of section 16(1) of the Act and, therefore, hold that clause 5 of the Memorandum is not a condition and it can be altered by a special resolution." It was further held that the approval of the court was not called for to effectuate the amendment. Respectfully following the decision of the Calcutta High Court, we hold that the provision for special dividends on preference shares or for equalisation of dividend is not a condition to be stated in the Memorandum of Association under section 13 of the Companies Act and, as such, the cumbersome process, if we may say so, of going through the approval of the Company Law Board and registering the special resolution along with the approval with the Registrar of Companies in terms of sections 18 and 19 of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... declared and paid dividends. We have considered his submissions very carefully. For the year ending on 30-4-1976, the corporation had proposed a 5% dividend in a sum of Rs. 4,99,750, but at the annual general body meeting held on 28-6-1976, the consideration of the accounts by the shareholders was adjourned sine die and no dividend was declared. Again, for the year ending on 30-4-1977, a dividend of Rs. 75,000 was proposed by the directors, but at the annual general body meeting, held on 26-9-1977, the question of declaration of dividend was deferred. However, before the third annual general body meeting of the corporation held on 19-12-1978, the dividend proposed for the year 1975-76 would appear to have been paid as the same is not found as proposed dividend under the head "current liabilities" for the year ending on 30-6-1978. As on 19-12-1978, the dividend proposed for the year 1976-77 was remaining unapproved by the shareholders and unpaid. No dividend was proposed for the year 1977-78. For the year ending on 30-6-1979, no dividend was proposed and the dividend proposed for the year 1977 was remaining unapproved and unpaid. In the period from 1-7-1979 to 30-6-1980, the dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counter to the corporation's claim as a charitable institution. Sri Anjaneyulu relied on the decision of the Bombay High Court in Western India Chamber of Commerce's case. 29. Having regard to rival submissions, we uphold the contention of the learned Chartered Accountant for the assessee. In the case before the Bombay High Court, Article 92 of the Memorandum of Association provided that in the case of winding up, the properties of the company were to be distributed among its members. The question was whether the income derived by the assessee from its immovable properties was entitled to exemption under section 4(3)(i) of the Indian Income-tax Act, 1922. It was held therein that the assessee was an organisation formed for charitable purposes and an organisation which provided for distribution of its property along its members on winding up is not for that reason an organization formed for the private gain of its members. It is only in the case of a winding-up that the property and the income of the organisation are to be distributed among its members. If during the lifetime of the organisation it is under an obligation to spend its income for charitable purposes, it can claim exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. CIT AIR 1931 PC 165, had stated that income, on its coming into existence, attracts tax at that point and the revenue is not concerned with the subsequent application of such income. In order to decide whether a particular disbursement amounts to diversion or application of income, the true test is to probe into and decide whether the amount sought to be deducted in truth did not or did reach the assessee as his own income. In order to claim deduction from the income on the principle of diversion by overriding title, in our considered opinion, there must be a disbursement before the income reaches the hands of the taxable entity. This disbursement had not taken place in the case of the assessee. In spite of the existence of clause 6 of the Articles of Association, we notice that no payment had been made to the Price Stabilisation/ Equalisation Fund in the year under appeal or in the preceding years in respect of all the incomes of the assessee-corporation. In other words, clause 6 of the Articles of Association remains only on paper and it has not been given effect to in the accounts of the corporation for the year under appeal or in any of the preceding years. On the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the corporation. Thus the fund has not taken shape. Therefore, there was no question of any diversion of or any accrual of liability. Sri Anjaneyulu relied on the order of the CIT (Appeals). 33. Having regard to rival submissions and the materials on record, we uphold the order of the CIT(Appeals). The Income-tax Officer in his assessment order for the assessment year 1981-82 had remarked as follows [para 69 of CIT(A)'s order]:- "The fund created by a G.O. of the State Government is held by the Director of Civil Supplies for which norms of utilisation are yet to be finalised. The draft proposals mentioned the following purposes:- (1) To incur expenditure towards remuneration, salaries, rent, rates, taxes, electricity in connection with the administration of the trust; (2) To sanction loans to the assessee-corporation for meeting future capital and revenue expenses; (3) To sanction grants for construction of buildings and godowns; (4) To advance loans to employees of the corporation ... ... ...." From the above extract, there is clear admission on the part of the Income-tax Officer about the existence of the fund created by an order of the State Government, and about its b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81 46,73,668 1,30,75,331 1,77,48,999 1,25,902 30-6-1982 1,76,23,097 1,30,07,535 3,06,30,632 2,94,543 30-6-1983 3,03,36,089 63,94,253 3,67,30,342 1,12,985 30-6-1984 3,66,17,357 38,32,099 4,04,49,457 - Balance at the end of the year 3,34,244 46,73,668 1,76,23,097 3,03,36,089 3,66,17,357 4,04,49,457 -------------------------------------------------------------------------------- The annexure to the profit and loss account under the caption "apportionment of administrative and other expenses" gives a commodity-wise analysis of the contribution to the price stabilisation/equalisation fund. The sum total of these contributions is shown under current liabilities and exhibited in the balance-sheet. Similar is the position in the case of preceding years from the year ending on 30-6-1979 onwards. The basis of the contribution is G.O.No. 303 dated 30-5-1980 in which the corporation has been directed to pay 2% of all its sales turnover. Clause 122 of the Articles of Association is as follows:- "Notwithstanding anything contained in any of these articles, the Government may, from time to time, issue such directives as it may consider necessary in regard to the affairs o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase price and the sale price of the goods were fixed by the Government. Subsidies to cover the losses were also received from the Government. The liability arising on the directive of the Government was cleared in the subsequent years by way of adjustments against the subsidies Hue to the corporation. Considering the above facts, the CIT(A) has held that the entire framework for conducting the business was provided by the Government and so the ratio of the decision of the Delhi Bench of the Tribunal in the case cited supra applied to the facts of the case. We are in agreement with his findings. Therefore, we reject the arguments of the learned departmental representative on this issue. 36. The last point in the departmental appeal is about the disallowance of Rs. 10,000 out of the provision of Rs. 25,000 for statutory audit fees. The CIT(A) felt that the sanction of the audit fees was governed by Board resolutions though it was subject to the permission of the Company Law Board and, therefore, the liability has to be allowed. The revenue is on appeal. 37. We have considered rival submissions. Sri Anjaneyulu brought to our notice a communication of the Ministry of Industry, Depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reads as follows:- "Sub-section (1) or (2) or (3) or (3A) shall not apply in relation to any income being profits and gains of business unless- (a) .......... or (b) the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution and separate books of account are maintained by the trust or institution in respect of such business." There are two important words, viz., "wholly" and "mainly" used in this clause. The user of the word "wholly" is in connection with charitable purposes. We have already held that the assessee-corporation is wholly a charitable institution. The user of the word "mainly" is in relation to the work in connection with the business. It is not in dispute that the assessee's business consisting of procuring, storing, transporting an 1 distribution of essential commodities and other consumable goods for the purpose of the advancement of object of public utility, is carried on under the directives of the Government by a board of directors appointed by the Government. The board consists of officers in the Indian Administrative Service appointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to comply with the provisions of section 11(4A)(6) of the Income-tax Act. If an interpretation is placed on the section to the effect that all the beneficiaries must be engaged in conducting the business of the corporation, it would amount to putting an impossible condition, because the assessee-corporation cannot employ the entire public living in the State of Andhra Pradesh. Such an intention cannot be attributed to the august Parliament. It is settled law that even if a section of the public is benefited by the activities of the charitable institution, the institution would be entitled to exemption as a charitable institution. Extending the same concept to identify the beneficiaries in the case of the corporation, we find that at least a section of the public are employed in the corporation, whether numercially large or small, and are engaged in the work in connection with the business of the corporation as members of staff at different levels of the organisation. 41. From a different angle also we hold that the provisions of section 11(4A)(b) have been complied with by the assessee. The primary object of forming the corporation is to assist the Government in the matter o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt of the income furnishes along with the return of income for the relevant assessment year the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed." From the above it would be evident that the provisions of section 12A are mandatory in nature. The power to condone the delay in the submission of the return lies in the exclusive domain of the Commissioner of Income-tax with which we are not concerned in this appeal. The main clause in section 12A specifically states that the provisions of section 11 and section 12 shall not apply in relation to the income of any trust or institution unless the conditions stated therein are fulfilled. Sub-sections (1) and (2) of section 11 deals with the income derived from a property held under trust wholly or partly for charitable or religious purposes. Section 12 created a fiction in that the voluntary contributions are deemed as income purposes of section 11 in certain circumstances. Section 12A cannot be read in isolation but has to be read with sections 11 and 12 together. Therefore, there is no merit in the contention of the assessee's counsel and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Company Law Board and registration with the Registrar of Companies on 2-1-1989. 2. Since I find myself unable to concur with the view taken by my learned Brother on both these issues, I hereby proceed to record my reasons for arriving at a conclusion different than arrived at by him. My reasons for saying so are these. 3. On facts, most of which have been succinctly detailed out in the proposed order and without being repetitive it is to add here that the Andhra Pradesh Civil Supplies Corporation Ltd. ('Corporation' for brief) was registered under the Companies Act, 1956 as a Public Limited Company and not as a section 25 Company. 4. The Corporation was assessed as a business concerned till upto 1979-80 with all its objects intact. It also unsuccessfully claimed in a Writ Petition before the High Court of Andhra Pradesh that it was a 'State' within the meaning of Article 12 of the Constitution of India and therefore its income is not liable to tax. 5. The main objects of the Corporation as incorporated in clause 3(A) of its Memorandum of Association run as under: "To engage in, promote, improve, develop, counsel and finance production, purchase, storage, processing, movemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (cl.35) (viii) To let out on lease or on hire, all or any of the property of the Company either immovable or movable including all and every description of apparatus or appliances. 7. Then comes the third category of objects under the heading 'Other objects' such as: "To carry on the business of carriers and for this purpose acquisition and maintenance of transport and establish factories for their maintenance of repair." 8. My learned Brother in the proposed order has drawn a distinction between the objects and powers and their overlapping holding that the predominant objects of the Corporation as contained in its memorandum of association are charitable in nature and that the other objects were merely powers incidental to the carrying out of this dominant and primary purpose. In my respectful opinion, each of the objects found in the memorandum of association unmistakably give the impression that they are commercial in nature. None of the objects - main or ancillary - go to show that the Corporation was established for advancement of any general public utility within the meaning of section 2(15) of the Act. Further clause 28 of the memorandum of association authorising and en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y differ with the view taken in the proposed order that the deletion takes effect from 16-11-1981 and not 2-1-1989. 13. On facts, the words inverted in the foregoing paragraph were sought to be deleted from clause 28 of the memorandum on 16-11-1981 by means of a Special Resolution passed by the Corporation on 15-10-1980. The procedure for the proposed alteration in the memorandum of association has been appropriately dealt with by my learned Brother in paragraph 24 of his order and need not be repeated. Taking a cue from the relevant provisions of the Companies Act, viz., sections 18 and 19 on this issue no room for any doubt is left to say that in view of the expression "thence" occurring in section 18(2) read with section 19 of the Companies Act, 1956 the condition precedent for the effectiveness of the alteration is its registration with the Registrar of Companies. I, however, disagree with my learned Brother whole hog to the legal competence of the Tribunal to barge into the overlapping of objects and powers to hold that what clause 28 of the memorandum stood for was only a power with the Corporation and not an object, which it is according to me both looking ostensibly and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oration to the Company Law Board, its long pendency there for several years and its ultimate approval on 2nd January, 1989? Even if all this rigmarole was superfluous it could stand wiped off only by way of appropriate legal proceedings and not in exercise of a jurisdiction vested in this Tribunal by section 254 of the Income-tax Act, 1961. 17. I may also add that after the Corporation had sought the approval to the amendment of clause 28 from the Company Law Board is it not that the Board which is the prime statutory body constituted by the Central Government for the Company Law administration could have refused the sanction either wholly or in part to impose such conditions as it had thought fit. The order of the Company Law Board under section 17 of the Companies Act, 1956 is discretionary and wide power is given to confirm the alteration either wholly or in part and on such terms and conditions as it may think fit. See Jayantilal Ranchhoddas Koticha v. Tata Iron & Steel Co. Ltd. AIR 1958 Bom. 155. Further in Bharat Mining Corpn., In re [1967] 1 Comp. LJ 119 (Cal.) it was held that the Board will not sanction an alteration for carrying on a new and totally independent business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s requested to do the needful in the matter. THIRD MEMBER ORDER 1. Consequent to a difference of opinion between the Members of A-Bench of the Income-tax Appellate Tribunal, Hyderabad, who heard the above appeals, certain points on which the Members differred were stated and the points of difference of opinion were referred to the President of the Tribunal under the provisions of section 255(4) of the IT Act on 25-5-89. The President being of the view that the points of difference were such as should be heard by more than one Member assigned the case for hearing to three Members, which is how this matter came before us for our opinion. 2. The assessment year under consideration is 1985-86 and the assessee has been assessed in the status of a company in which the public are substantially interested. The total income computed by the order of assessment dated 18-3-1988 was Rs. 7,29,54,065. 3. In subjecting the aforesaid total income to tax, the Income-tax Officer negatived the claim of the assessee that the income was exempt under section 11 read with sections 2(15) and 2(31) of the IT Act. In making the computation, to the returned income of Rs. 6,63,90,898 certain other add back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless the business is carried on by an institution wholly for charitable purposes and the work in connection with the business is mainly carried on by the beneficiaries of the institution and separate books of account are maintained by the trust or the institution in respect of such business, the exemption under section 11 of the Income-tax Act, would not be available, and in the case of the assessee this condition was not satisfied. (v) Non-compliance of provisions of section 12A of the Income-tax Act disentitled the assessee to avail exemption for its income." 5. In the appeal of the revenue before the Tribunal, while the revenue contested in the grounds initially taken the findings of the Commissioner (A) at items 4(a)(ii) & (iii), it filed an additional ground whereby the revenue assailed the findings of the Commissioner (A) at item 4(a)(i) above that the objects of the assessee-corporation were charitable in nature. The additional ground was admitted by the Tribunal. 6. The Accountant Member eventually held, as far as the issues now under consideration are concerned, as under: "(1) that the assessee-corporation is a charitable institution within the meaning of section 2( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Accountant Member, that, in the absence of registration of the assessee corporation under section 12A of the Income-tax Act, exemption was rightly denied to the assessee, no longer survives, because the Commissioner of Income-tax has subsequently accorded necessary registration. The points of difference formulated and which were referred to the President under section 255(4) by the two Members are as under: "(1) Whether in view of the facts and circumstances of the case, the question of overlapping between the objects and the powers qua the objects - main, ancillary and residuary - could be gone into by the Tribunal particularly when it is not raised by the assessee before us, but dealt in by the first appeallate authority?" "(2) Whether in view of the facts and circumstances of the case, the amendment to cl. 28 of the memorandum of association could be taken to be effective from 16-11-1981 the date of the passing of a Special Resolution de hors its approval by the Company Law Board and registration with the Registrar of Companies on 2-1-1989?" "(3) Whether on the facts and in the circumstances of the case, the Andhra Pradesh State Civil Supplies Corpn. Ltd.'s case is a charit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see had raised the plea before the Tribunal, and therefore, the Tribunal should not have embarked upon an examination of the issue. 12. We have considered the contentions. Factually the Commissioner (Appeals) had dealt with the question of overlapping between the main powers and objects in his order and the counsel for the assessee had relied on the decision of the Supreme Court in the case of Surat Art Silk Cloth Mfrs. Association before the Tribunal. Further the revenue had advanced specific arguments in this regard before the Tribunal and on behalf of the assessee reliance was placed on the decision in the case of Surat Art Silk Cloth Mfrs. Association. In the judgment there is reference to the objects and powers vis-a-vis the Memorandum and Articles of Association. 13. The Supreme Court in the case of CIT v. Mahalakshmi Textile Mills Ltd, [1967] 66 ITR 710, at page 713 has observed:- "If for reasons recorded by the departmental authorities in rejecting a contention raised by the assessee, grant of relief to him on another ground is justified, it would be open to the departmental authorities and the Tribunal, and indeed they would be under a duty, to grant that relief. The ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of dividends as falling within the scope of the Articles of a Company alone. Therefore, it was submitted that even if the said matters may have found place in a clause in the Memorandum of Association, in terms of section 16(3) it was clearly permissible that such provisions could be altered in the same manner as any alteration could be made in the Articles of a Company. For this purpose passing of a Special Resolution was therefore sufficient Inasmuch as a Special Resolution in this regard had been passed on 16-11-81, notwithstanding such resolution having formed the bedrock for making the subsequent application in 1982 to the Company Law Board the amendment made in clause 28 of the Memorandum of Association by omitting the words "or for redemption of debentures or redeemable preference shares for special dividends or for equalising dividends", the learned counsel contended, took effect from the very date of the Special resolution. Since in substance what was effected was an amendment to the Articles of Association, the coming into force of the amended provisions could not stand postponed till the registration of the approval granted by the Company Law Board took place on 2-1-8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head "Objects incidental or ancillary to the attainment of the main objects". He, therefore, stated that the company clearly envisaged the said clause and its entire contents as forming part of its objects. The learned standing counsel then referred to the statements made in the annual reports of the Directors starting from the accounting period ended 30-6-1980, i.e. the 5th Annual Report for 1979-80 right through to the 9th Annual Report which was for the previous year now under consideration (ended 30-6-1984) to reinforce his argument that clause 28 was only an object and its amendment took effect from 2-1-1989. The relevant portion of the Directors' report in the 9th Annul Report relating to the previous year under consideration read as under: "Dividend: As the members are aware, the special resolution passed at the Extraordinary General Meeting held on 15-10-1980 adopting en bloc amendments to the Memorandum and Articles of Association of the Corporation as approved by the Government vide G.O. RT. No. 2033 dated 9-10-1980 deleted among others all the clauses relating to declaration and payment of dividends and introduced a provision that all income of the company should belon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as reported above were carried out for satisfying our first contention.........." 18. Before we proceed further, we may state that to set the record straight, certain clarifications were obtained at the time of hearing from the parties and the correct position that emerged regarding the en bloc amendments referred to above is as under: Certain amendments which were exclusively pertaining to Articles of Association were passed by a special resolution at the Extraordinary General Meeting held on 15-10-1980. Consequent to this, the Articles of Association, in particular 93 to 107 which dealt with dividends, were deleted. In addition, Article 5 and Art. 6 were also amended. Article 5 dealt with increase in the authorised share capital of the company to Rs. 10 crores divided into 1,00,000 equity shares of Rs. 1,000 each and Article 5(b) provided that the total share capital shall be contributed by the State Government. Art. 6 as amended stated as under: "No part of the funds of the Company shall be employed in the purchase of or in loans upon the security of the Company's shares. All income of the Company shall belong to the price Equalisation/Stabilisation Fund, Department of Civil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deletion of the words referred to in clause 28 related to making a change in the objects or deletion of a power. According to the Accountant Member it was deletion of a power whereas according to the Judicial Member it was a clear change in the objects. The standing counsel submitted that the second point of difference as referred did not highlight the difference between the interpretation of the deleted matters as to whether it was an object or power that was being affected, but looking to the manner in which the point of difference had been formulated, it was clear that point No. 2 took in within its purview a determination of this facet. 20. The learned counsel for the assessee submitted that the Andhra Pradesh High Court in the case of Nehru Pasuvalla Santha & Gramabhivrudhi Sangham had observed as under:- "For the purpose of determining the character of a trust, i.e. whether it is intended wholly for charitable purposes or not and whether a particular object is primary or ancillary or subsidiary to the main object, one has to look at the Memorandum of Association of such trust and the admitted facts. Whether a particular object is purely ancillary or subsidiary, or primar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly considered the rival submissions. The memorandum of the assessee in item III has made a bifurcation between the main objects [sub-division (a)] and objects incidental or ancillary to the attainment of the main objects [sub division (b)]. Clause 28 falls in sub-division (b). The Memorandum itself describes the clause as an object incidental or ancillary to the attainment of the main objects. Section 13(1) of the Companies Act refers to what the Memorandum of every company shall state and clause (d) thereof reads:- "In the case of a company formed after such commencement- (i) the main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects; (ii) other objects of the company not included in sub-clause (i);" Clause 28 ex facie falls under section 13(1)(d)(ii). It was because of this that an application was moved under section 17 of the Companies Act for permission to change the Memorandum before the Company Law Board. The Company Law Board also accorded permission thereafter and such fact was duly registered with the Registrar of the Company Law Board. The learned counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered to be charitable in nature within the meaning of section 2(15) of the Income-tax Act, 1961 as held by the Judicial Member. The learned Standing Counsel relied on certain decisions to submit that Courts were declined to hold that those entities were charitable only because they were declared to be so under section 25 of the Companies Act. The cases relied on in this regard were Dharmadeepti v. CIT [1978] 114 ITR 454 (SC) and Swat An Silk Cloth Mfrs. Association's case. He also submitted that the objects in the present case related to carrying on of commercial activities. This implied the earning of profits and as long as a clause exists permitting declaration of dividends there was the motive of private gain. He stated that notwithstanding the amendment of Article 6 of the Articles of Association in 1980 to the effect that income of the Company belongs to the Price Equalisation/Stabilisation Fund, Department of Civil Supplies, Government of Andhra Pradesh. It did not alter the position that there still did exist private gain because the clause that existed in the Memorandum of Association, viz., clause No. 28 still permitted declaration of dividend. He also submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il Supplies, Government of A.P. Ownership vests in the Fund as such and the amount does not go into the coffers of the State Government. The manner in which the amount which may be in the Fund has to be utilised has not been spelt out. That is left to the discretion of the Government. It necessarily has to be so in view of very rapidly changing economic factors. Holding the price line is essential to counteract inflation and in our view it cannot be disputed that it is an object of general public utility. We see no difference. 26. The Supreme Court in Andhra Pradesh State Road Transport Corpn.'s case at page 10 observed as under:- "The submission founded upon section 22 is based upon a misunderstanding of what that section provides. A road transport corporation cannot be expected or be required to run at a loss. It is not established for the purpose of subsidising the public in matters of transportation of passengers and goods. The objects for establishing a road transport corporation are those set out in section 3 of the RTC Act which we have already reproduced above. Section 18 shows that it is the duty of a road transport corporation to provide, secure and promote the provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n organisation and the purpose of Civil Supplies Corporation is to ensure supply of grains, edible oils etc. to the masses through approved outlets by grant of substantial subsidies and thus hold the price line which is the object of the Fund referred to in Article 6. In this very year a subsidy of Rs. 44,66,51,914 was granted by Government but for which there would have been a huge loss, an undisputed fact. Thus whether the fund has been set up or not would not alter the position in determining whether the primary object of the assessee is charitable purpose or not inasmuch as the income is attached with a legal obligation to hold it for the purpose of creating a fund for equalisation of prices. We have to hold that the primary object of the assessee is charitable. 28. We have also to hold that merely because a profit resulted, the object does not cease to be charitable. As pointed out by the Supreme Court, no activity can be efficiently, properly, adequately or economically carried on unless it is carried on business principles. This is all that the ancillary and incidental objects spell out. In any case the words "not involving the carrying on of any activity for profit" in sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s' Union v. CIT [1981] 132 ITR 62 supported the view that in such an event, the requirement of section 2(15) was not satisfied. He very fairly pointed out that the ratio of the decision of the Bombay High Court in Western India Chamber of Commerce's case was to the contrary effect. 31. It is to be remembered that when the assessee corporation was brought into existence by the Government Notification on 26-7-1974, it clearly provided that the assets that were owned by the Government were transferred to the Corporation. Further Government of Andhra Pradesh is the only share-holder. It is thus clear that the assets available for distribution in the event of winding up should go to its previous owner and the only share-holder (i.e.) the State Government. The Government order of 1974 G.O.Ms.No.701 dt. 26-7-1974 of Food and Agriculture Department may now be reproduced. "Government of Andhra Pradesh Abstract Companies - Civil Supplies - Purchase of food grains and other essential articles - Formation of the "Andhra Pradesh State Civil Supplies Corporation Private Limited" - Orders - Issued. Food & Agriculture (CS. III) Department. G.O.Ms.No.701 Dated : 26th July, 1974 ORDER The Go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vernment which had transferred its own assets to the assessee company for setting it up. Therefore, on the facts the distribution of assets in the present case is only a return of the assets to the government with whose assets the assessee came into being. On the facts, therefore, we consider that Article 132 also does not militate against the conclusion that the assessee is a charitable entity. 32. We have already set out the findings of the Accountant Member. Out of the eight findings given by the Accountant Member, one finding the exemption was to be denied, no longer subsists, because retrospectively the assessee has been granted registration by the Commissioner of Income-tax under section 12A of the Income-tax Act. The Judicial Member had differed from the learned Accountant Member on the point as to the date from which the amendment to clause 28 of the Memorandum of Association took effect, i.e., whether it was from 16-11-1981, a date which fell prior to the commencement of the accounting period or 2-1-1989 or a date which fell subsequent to the commencement of the accounting period. We have agreed with the learned Judicial Member that the amendment came into effect only fro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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