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TMI Blog2012 (11) TMI 429X X X X Extracts X X X X X X X X Extracts X X X X ..... or the years under appeal, the Assessing Officer for the first time denied the assessee's claim for exemption of its income under Section 11 of the Act. He held that the assessee was carrying on the business of rendering services not only to its members but also to non-members and therefore the provisions of Section 11(4A) were attracted, with the result that exemption u/s. 11(1) could be given only if (a) the business was incidental to the carrying out of the objects of the Trust and (b) separate books of accounts were maintained for the business. According to him, the activities of the asessee were not charitable in nature. The assessee's appeal to the CIT (Appeals) for the assessment year 2006-07 was accepted; the CIT(Appeals) recorded a finding that none of the objects or activities undertaken by the assessee was sullied with a profit motive, that there was no business activity carried on by the assessee and, therefore, there was no need to maintain separate books of accounts for such activities. He also held that the generation of income is not a conclusive test for determining the charitable nature of the activities. He accordingly directed the Assessing Officer to allow the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he finding of the Assessing Officer is that the assessee is carrying on business activity by rendering professional services to members and non-members and it is not carrying on any charitable activity. The latter finding of the AO cannot be upheld in view of the fact that the assessee's objects are charitable in nature and it has been registered u/s 12A. therefore, the only thing which can be done on the facts of the case is to ascertain the business income, whether such income is incidental to the objects, whether books are maintained for the business and quantum thereof. If the conditions prescribed in section 11(4A) stands satisfied, the assessee will be entitled to other deductions u/s 11, otherwise not. As mentioned earlier, these facts could not be ascertained by the AO due to paucity of time. Therefore, the matter is restored to the file of the AO to ascertain facts in this matter, hear the assessee and pass a fresh order as per law. Thus, this ground is treated as allowed for statistical purposes. 6. In so far as the deduction of depreciation is concerned, the case of the ld. Counsel is that the assessee has never written off capital assets from its acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er such income is incidental to the objects, whether books are maintained for such business and quantum thereof. Thereafter, the AO has been directed to examine whether condition prescribed in section 11(4A) has been satisfied. Since these matters could not be ascertained by the AO due to paucity of time, the matter was restored, to his file. Thus, as such there is no mistake apparent from record in the order, which can be rectified u/s 254(2) of the Act. 4. In the result, the application is dismissed." 6. The questions of law sought to be urged on behalf of the appellant-assessee are several in number, but the crux of the issue is whether the Tribunal was right in law in holding that the provisions of Section 11 (4A) were attracted to the assessee's case. Accordingly we frame the following substantial question of law for both the years:- "Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the provisions of Section 11(4A) of the Act were attracted to the assessee's case and consequently in remanding the case to the Assessing Officer with directions." 7. The answer to the question depends ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 11(4A). In CIT, Madras vs. Andhra Chamber of Commerce (1965) 55 ITR 722, it was held by the Supreme Court that advancement or promotion of trade, commerce and industry leading to economic prosperity enured for the benefit of the entire community; that prosperity would be shared also by those who engaged in trade, commerce and industry, but on that account the purpose was not rendered any the less an object of general public utility. Echoing these sentiments another Bench of equal strength of the Supreme Court in Commissioner of Income Tax, New Delhi vs. Federation of Indian Chambers of Commerce and Industries, New Delhi (1981) 130 ITR 186 held that where the main object of the assessee was the promotion, protection and development of trade, commerce and industry in India, its income from conducting a trade fair, rent for space allotted and sale of entry and gate tickets, fees for arbitration etc. would be exempted from tax under Section 11 read with Section 2(15) of the Act. The "dominant purpose" test was applied to hold that the activities to earn income were not driven with the motive of profit-making. In this judgment, separate opinions were expressed by each of the th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived by a trade, professional or similar association from specific services performed for its members shall be chargeable to income tax under the head "profits and gains of business". The clause aims at destroying the principle of mutuality under which associations or combination of persons, in which both the contributors and the participators are identical, are kept away from the tax net on the principle of mutuality. The principle of mutuality is just this, namely, that where there is identity between contributors to and participators in a fund, there can arise no profit which can be made the subject matter of taxation. Section 28(iii) appears to have been enacted, as in the case of its predecessor, to bring to charge the surplus of a mutual association which would not otherwise be chargeable. The trade, professional or similar association, including a chamber of commerce and industry has no separate existence apart from the members constituting it and when the members pay fees for services rendered by the association and a surplus arises to the association, it actually belongs to the members who had availed of the service. Thus there is identity between the contributors to and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15). So far as Section 28(iii) is concerned, Sethuraman, J. speaking for a Division Bench of the Madras High Court, referred to Section 10(6) of the 1922 Act and contrasted the same with Section 28(iii) of the Act in the following words:- "The underlying idea behind s. 28(iii) is that there must be a business from which income is derived and that in the course of such business specific services must be rendered for its members. The concept behind s. 28(iii) is to cut at the mutuality principle being relied on in support of a claim for exemption, when the assessee was actually deriving income or making profits as a result of rendering specific services for its members in a commercial way. Under the Indian I.T. Act, 1922, s. 10(6) provided: "A trade, professional or similar association performing specific services for its members, for remuneration definitely related to those services shall be deemed for the purpose of this section to carry on business in respect of those services, and the profits and gain therefrom shall be liable to tax accordingly." It may be seen that under this section, a statutory fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and that such receipts may be exempt under certain conditions. It is not, therefore, enough if there are receipts. Such receipts must be considered in the context of all the provisions of the Act. Section 11(4) provides that for the purpose of this section "Property held under trust" includes a business undertaking so held. Therefore, even if there is a business, which yields income, so long as the business is held under trust, its income would be exempt from tax. It is not suggested that the properties were held otherwise than under trust. Section 28(iii) would not apply, to tax income from such a business, as otherwise, the benefit sought to be conferred under s. 11 would be destroyed, and the exemption provision would be stultified." 12. In most of the cases, the services are performed in the true spirit of service to the members of the association (such as a chamber of commerce) and the fees charged are so calculated or fixed that it merely covers the costs incurred by the association in rendering the service. Since accuracy in matching the costs and the fees charged cannot be maintained consistently, there can arise a surplus. The mere arising of a surp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as business income or under the residual head, depending upon the question whether the activities of the association with the non-members amount to a business or otherwise. 15. CIT vs. Andhra Commerce of Chamber (supra) introduced the possibility of some of the trade, professional or other similar association being entitled to the exemption under Section 11. It seems to us that all that Section 28(iii) does is to constitute certain income of the association to be business income without affecting the scope of the exemption under Section 11. Section 2(15) which incorporates the definition of "charitable purpose" as including relief of the poor, education, medical relief and the advancement of any other object of general public utility, on the lines of what Sir Samuel Romilly suggested to the Court in Morice v. Durham, Bishop of Durham, (1805) 10 Ves Jr. 522, shows that several mutual associations may also fall within the definition. On this basis, a Gymkhana Club formed to promote physical fitness, sports and games and social intercourse amongst the members has been held entitled to the exemption under Section 11 by the Madras High Court in Commissioner of Income-tax v. Ootacamund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Diamond Merchants Association (1981) 129 ITR 214 (Mad.) Jewellers and Diamond Merchants Add. CIT v. Automobile Association of Southern India (1981) 127 ITR 370 (Mad.) Automobile owners The predominant intention theory was applied in these decisions and it was found that none of these associations worked for a profit and they were essentially associations established for the protection of interests of businessmen carrying on a particular trade. 17. Turning specifically to the facts of the case before us, we find that there is no dispute that the objects of the assessee are charitable in nature within the meaning of Section 2(15) of the Act. The Tribunal has so held and that finding is not under challenge before us by the Revenue. Clause 4 of the memorandum of association proscribed the distribution of profit and is in the following terms:- "4.The income and property of the Company whensoever derived shall be applied solely towards the promotion of the objects of the company as set forth in this Memorandum of Association, and no portion by way of dividend or bonus or otherwise, shall be paid to the persons who at any time, are, or have been, members of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on pursuant to the objects and, therefore, they do not constitute business. At the same breath it has also been observed that the receipts were earned by repetitive activities, which can rightly be termed as business. Having regard to the authorities which we have noticed above it is not proper to characterise the activities of the chamber as activities amounting to a business in the generally understood sense of the word, the most important feature of business being profit motive. It has not been suggested by the income tax authorities that the activities carried out by the assessee chamber were propelled by any profit motive. In such circumstances, it is proper to view the activities as driven by a charitable motive in the sense in which a charitable purpose is defined in Section 2(15) of the Act. In this view of the matter, we are satisfied that the provisions of Section 11(4A) are not attracted to the present case and a remand to the Assessing Officer for finding out whether the activities were incidental to the objectives of the trust and separate books of accounts were maintained for such business was unnecessary. We accordingly answer the substantial question of law framed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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