Commissioner of Income-Tax West Bengal-Iii, Calcutta v. M/S. Indian Sugar Mills Association

GUPTA, J;-The common question arising for decision in these four appeals is whether the income derived by the respondent, Indian Sugar Mills Association, from its sugar export division is exempt frcllll tax under sec. 4(3)(i) of the Income Tax Act, 1922. The assessmen'. years are 1958-59, 1959-60, 1960-61 and 1961-62 for which the previous years are respectively the calendar years 1957, 1958, 1959 and 1960.

The Indian Sugar Mills Association, hereinafter referred to as the Association, which has its office in Calcutta is a Trade Uni0ll regia-tered under the Trade Unions Act, 1926; any individual, firm or com-pany owning or managing a sugar mill or factory is eligible for mem-bership of the Association. Rule 3 of the Rules q1 the Association states the various objects for which the Association is established and, of them, the first two, namely Rules 3(a) and 3(b) ate as follows :-

"(a) To promc~e and protect the trade, commerce and in-

dustries of India and in particular, the trade commerce and industries connected with sugar.

(b) To encourage friendly feeling and good relations

amongst the sugar mills in general and the members in particular and also between producers of sugar and c~ne-growers,_ distributCJrs of sugar and other dealing with sugar mills and connected with sugar industry." It was claimed on behalf of the Association that the business it carried on was in the .nature of property held under tmst or legal obligation to apply the mcome fnr clnritnble purnoses within the meanino of clause (il, sub-section (3) of.section 4 of the Income-Tax Act, 1922; the last paragraph of sub-section ( 3) defines "charitable purposes" a11 includin~ relief of the poor, 1education, medical relief and advancement cjf any other object of general public utility. The claim for exemption appears to have been based on the objects mentioned in Rules 3(a) and 3(b) and on· the first part of clause (a) of Rule 4. Clauses (a) and ( b) of Rule 4 regulate the application of the funds of the Asso-ciation. The first part of Rule 4(a) reads :

"4. (a) Subject to such special rules as may be framed felt' the purpose, the income and property of the Association whensoever derived, shall be applied solely towards the pro-motion of the Association as set forth in these Rules and Regulations and no portion thereof shall be paid cc trans-ferred, directly .or indirectly, by way of dividend or bonus 0r otherwise howsoever by way of profit, to the persons who at any time are, or have ·been members of the· Association or to any of them or to any persc111 claiming through any of them." · Rule 4 (a) has a proviso to which it is not necessary to refer for the present purpose. The Income-tax .Officer, the Appellate Assistant Commissioner and the Tribunal all rejected the claim though not exactly for the same· reasons. At the instance of the Association the Tribunal referred the following question to the High Court at Calcutta under sec. 66( 1) of the Incc!IIle Tax Act, 1922 :

"Whether on the facts and circumstances of the case and on proper construction of the Rules and Regulations of the Association, the Tribunal was justified in holding that the in-come of the Asscr.iation derived from the business of . export of sugar and interest from current and fixed deposits were not exempt from tax under section 4 ( 3) (i) of. the Indian Income-tax Act, 1922 ?"

Tlie High Court ans:wered the question in the negative and in favour of the as~essee. These four appeals preferred by the Ccl!llmissioner of · Income Tax, West Bengal-III, Calcutta, with certificate granted "by the High Court under section 66A(2) of the Income Tax Act, 1922 are directed against the judgment. of the High Court disposing of the refe-rence and relate to the assessment orders made in respect of the afore-said four years.

The High Court observed that the question referred to it should be decided upon the principles laid down by the Privy Council in re The Trustees of the 'Tribune', 7 I.T.R. 415 and All India Spinners' A.rso-ciation v. Commissioner of rncome-tax, Bombay, 12 I.T.R. 4182 and by the Supreme Court in Commissioner of Income-Tax, Madras v. Andhra Chamber of Cpmmerce,. 55 I.T.R. 722.· Of the several prin-ciples stated in the Tribune case (supra), the one to which the High Court made special reference is that in countries to which English ideas may be inapplicable, the courts must in &eneral apply the standard of customary law and common opinion amongst the community to which the parties interested belong in deciding whether an object is of geD.CI'.al public utility. Referring to this principle the High Court observed that "section 4(3 )(i) is of .wider amplitude than what is known as religious 8-L319SupCI/7S or charitable purposes in English Law and a purpose of general public utility has to be ascertained with reference to conceptions prevailing in our countl'Y". We are afraid we dq not· see how this principle has rele· vance on the question wider consideration in the present case because no conflict arises here betwe1en the Eng[sli and the Indian conceptions of charitable purpose. In the Spinners' Association case (supra) the Privy Council fcfl!Ild that the primary object of the Spinners Asso-ciation was the relief of the poor which was a charitable purpose, that the objects of the said Assoc.iation included the advancement of other purposes of general public utility, and held that as such the inceme of the Spinners' Association was exempt under section 4(3)(i). Their Lordships further observed that an object of general public utility "would exclude the object of private gain, such as an undertaking for commercial prqfit though all the same it would subserve general pub-lic utility". This observation, as will appear later, has a beJring on the question that arises for decision in the instant case.

The J ud~ent of the High Court is really based on tho decision of this Court in Commissioner of ltu:ome-Ta.x, Madras v. Andhra Cham- '1er of Commerce, 55 1.1'.R .. 722; the learned counsel for the respon-dent also relied almost entirely on this case. The Andhra Chamber of Commerce was a company facorporated under the Indian Companies Act (7 of 1913); it was permitted under sec. 26 of the Act to omit the word "limited" from its name by order of. the Govern-ment of Madras. Of the findin~ recorded in the Andhra Chamber of Commerce case, the following are material for the purpose of the present appeal :

(i) Advancement or promotion of trade, commerce and

industry leading to economic property enures for the benefit of the entire community. That prosperity would be shared also by those who engage in trade, commerce and industry but on that account the pur-pose is not rendered any the less an object of general public utility.

(ii) The expressicn "object of general public utility" is

not restricted to objects beneficial to the whole of mankind or even all persons living in a particular country or province. It is sufficient if the intention is to benefit a se.ction of the public as distinguished frqm specified individuals. The section of the public sought to be benefited must undoubtedly be suffi-ciently defined and identifiable by some common quality of a pub!lic or impersonal nature : where there is no common quality uniting the potential bene· ficiaries into a class, it may not be regarded as valid. (iii) If the prinlary purpclle be advancement of objects of

general public utility, it would remain charitable even if an incidental 1~ntry into the political domain for achievinr: that purpose is contemplated.

On the facts of that case it was held that the principal objects of the Chamber ol' Commerce were to promote and protect trade, commerce and industries and to stimulate the development of trade, commerce and industries in India or any part thereof and one of the objects men-tioned in the Memorandum of Association that the Chamber of Com-merce might take steps to urge or oppose legislative or other measures affecting trade, commerce or I\lanufactures was purely ancillary or subsidiary aimed at securing the primary objects. In the case before us the High Court held that clauses (a) and (b) of Rule 3 of the Rules cif the Association, quoted above, set out the primary objects of the Association which were objects of general public utility, and the other objects appearing from !the remaining clauses of Rule. 3 were only ancillary. Relying further on a part of Rule 4(a), which we have reproduced above, providing that no part qf the inoome and property of the Association was to be paid or transferred by way of dividend or bonus or otherwise by way of prctfit to the members of the Associ~tion, the High Court came to the conclusion that the Association was under a legal obligation to hold the income it derived frqm the business of export of sugar for charitable purposes.

The exemption under section 4(3) (i) can be claimed if the income is held wholly .for religious er charitable purposes; this requirement is satisfied, as held in the Andhra Chamber af Commerce case (supra), if the primary purpose is religious or charitable and the other purposes, not by themselves religious or charitable, are ancillary and serves to achieve the main purpose. Assuming clauses (a) and (b). ci Rule 3 disclosed objects of general public utility, it is necessary to examine some of the. other Rules of the Association to find out if it held the income derived from the business whcilly for charitable purposes. The general prohibition oontained. in the first part of Rule 4 (a) against sharing of profits by the members appears to have been made almost nugatory by Rule 64 which is as follows :

"64. Subject ·to such. rules as the General Meeting may frame or. prescribe fc!r declaration of dividend and distribu-tion of profits, the profits of the A~sociation shall be applied in such maner as the Committee may in their discretion think fit provided nevertheless that no distribution of profits amongst members will be made unless sanctioned by a Reso.- lution at a General Meeting of the Association held for the purpose."

Rule 64 thus permits distribution of profits among the members on a resolution being passed for the purpose at a General Meeting cd' the Association. Under Rule 64 the Committee of the Association "may in their discretion" decide to apportion the entire profits amQ11g the members of the Association leaving nothing to be applied towards the alleged primary objects. We are not prepared to accept the submission made on behalf of the respondent that the power conferred on the Committee by Rule 64 to decide how the profits are to be applied is only incidental to the carrying out of the primary objects which are charitable. There is nothing in Rule 64 that suggests so; there is no indication that the rules framed or the resolution passed at the general meeting must require a part at least o'f the profits to be set apart for the charitable purposes. .Rule 64 introduces an element of private gain which is inconsistent with the:. object of general public utility and follow-ing the decision in All India Spinners Association v. Commissioner of Income-Tax, Bombay (supra) it cannot be said that the Association in the instant case held the income it derived from its business of ex-port of sugar wholly for charitable purpq;es. This is also what dis-tinguishes the present case from the Andhra Chamber of Commerce case where it was found that the Chamber of Commerce had no profit motive, that its objects were to prcmote and protect the trade, com, merce and industries and to stimulate their development and its other objects were ani;illary and illlcidental to the principal objects.

Dr. Pal for the re&pondent also submitted that if Rule 64 appeared as to be inconsistent with the primary objects, it shcp.tld be treated void and of no consequence. Undoubtedly Rule 4(a} and Rule 64 are repugnant to each other. But the rule of construction of deeds and wills on which Dr. Pal relied, that in case of repugnancy the first words in a deed and the last words ini a will shall prevail, is not appli-cable to the rules and regulations of a registered trade union in order to find out its real object. We have no right to assume some of the stated objects of the Association as primary to declare others in appa-rent conflict with them as of no effect. Rules 3, 4 and 64, all framed by the Association as a rraide Union, co-exist. We have no right to rewrite the rules of a registered trade union .by deleting any of them.

We also find it difficult to accept that only clauses (a) and (b) of Rule 3 represent tJ!.e primary objects of the Association and the other Rules are all ancillary and incidental. The Associati<>n is a Trade Union. Section 2(h) of the: Trade Unions Act, 1926 defines Trade Union as meaning "anv combination, whether temporary or perma-nent, formed primarily for the purpose of regulating the· relation bet-ween workmen and employers or between workmen and workmen, or between employers and employers, or for imposing restrictive condi-tions on the conduct of any trade or business, and includes any 'federa-tion of two or more Trade Unions:" There is a proviso to this defini-tion which is not relevant on the ql.Jestion under consideration. The definition itsc:lf sets out the primary purposes for which a trade union can be formed; The objects of the Association listed .under Rule 3 include the following :

" ( c) To regiilat.e terms and conditions of employment in

. the Mills and Factories. · (d) To promote good relations between the employers

imd the employees.

* "' "' "' (1) To adjust· oon'1'0Versies between members of 1ibiS

Association.

( n) To establish just and equitable principles in. trade

and impose restrictive conditions on the conduct of sugar trade and business."

These are all primary purposes of a Trade Union. Rule 3 (b) alscj may possibly be taken as a trade union object. Assuming Rule 3(a) could be the primary object of a trade union, the other objects named in clauses (c), (d), (I) and (n) ·of Rule 3 also fall in the same cate· gory, and it is nett possible to speak of one of them as ancillary or incidental to another. These other objects cannot also be called chari-table purposes within the meaning of section 4(3) (i), even assuming that in some remote and indirect manner they might be of some public utility. It is not therefcire possible to agree that the Association held the income derived from its business wholly for charitable purposes.·

For the reasons stated above we allow these appeals, discharge the answer given by the High Court to the question referred to it, -and answer the question in the affirmative and in faVCl\ll" of the Revenue. The appellant will be entitled to his costs in this Court as well as in the High Court. One hearing fee.

Appeals allowed.

CIVIL APPELLATE JURISDICTION : Civil Appeals Nos. 1225 to 1228 of '1970.

From the judgment and order dated the 11th July, 1969 of the Calcutta High Court in Income Tax Reference.No. 213 of 1966.

S, T, Desai, J. Ramamurthi and R. N. Sachthey, for the appellant. B. Sen and D. Pal, R. S. Tahore, 0. P. Khaitan, B. P. Mahesawari. and Leila Seth. for the respondent.