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SUPREME COURT OF INDIA
Y.V. CHANDRACHUD AND P.S. KAILASAM, JJ.
The Commissioner of Income-tax, Kerala, Appellant
Versus
The Dharmodayam and Co., Kerala, Respondent.
Civil Appeals Nos. 1521-1523 of 1973,
D/- 22-8-1977.
Advocates Appeared
Mr. J. Ramamurthi and Mr. Girish Chandra, Advocates, for Appellant; Mr. S. T. Desai, Sr. Advocate (In C. A. No. 1521 of 1973); Y. S. Chitale, Sr. Advocate (In C. A. Nos. 1522-23 of 1973), (M/s. Paripurna and A. S. Nambiar, Miss Pushpa Nambiyar, and Mr. M. Mudgal, Advocates with them), for Respondent.
Income Tax Act, 1922 - Section 4 (3) (i) - Indian Companies Act, 1956 - Cochin Companies Act – Constitution of India, 1950 - Article 39 - Applied for religious or charitable purposes - Purposes was exempt from taxation - Reserve for bad debts – Whether on facts and in circumstances of case Appellate Tribunal is correct in law in holding that income derived by assessed is exempt under Section 11 (1) (a) of Income-tax Act, 1961 - Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that setting apart reserves under Art. 39 of assesses memorandum did not vitiate charitable purpose of the institution - Whether income received by assesses by conducting kuries is exempt from taxation - Whether conducting kuries business involved the carrying on of any activity for profit - Instant case arose after the Income Tax Act of 1961 came into force, the assessment year - Income-tax Officer declined to grant exemption in respect of the income derived by assesses from its kurie business but that order was set aside by Appellate Assistant Commissioner whose judgment was confirmed by Appellate Tribunal - These two authorities held that despite amendment introduced by the Act of 1961 is S. 2 (15) earlier decision would apply and assesses was therefore entitled to claim exemption in regard to its income from kuries - Tribunal at instance of Revenue referred following two questions for the opinion of High Court - Assessed also filed two writ petitions in High Court challenging by one writ petition a notice for reopening an assessment and by other a notice calling upon it to file a return - High Court answered both questions in favor of assesses allowed writ petitions and quashed the notices - These appeals by special leave are directed against judgment and orders of High Court - On first of the two questions referred to High Court for its opinion it becomes necessary to consider comparatively relevant provisions of S. 4 (3) of Income Tax Act 1922 as it existed when the Kerala High Court decided and provisions contained in the relevant part of S. 11 read with S. 2 (15) of the Income Tax Act 1961 – Held, Among Kerala cases which went on the wrong test we wish to mention one - Assessed-company was conducting a profitable business of running chit funds and its memorandum of association had as one of its objects `to do the needful for the promotion of charity, education and industry. The court found it possible on these facts to grant the benefit of Sec. 2 (15) by a recondite reasoning - If this ratio were to hold good businessmen have a highroad to tax avoidance shows how dangerous consequence can be if the provision were misconstrued - This is square and scathing comment on judgment now in appeal before us and Court has expressed its view in unequivocal language - But court cannot accept that Court overruled as stated in the head note of report judgment of Kerala High Court and that court must without considering facts of case allow appeal straightway - Facts of instant case were not before the Court in Indian Chamber of Commerce and it is evident from passage extracted above that test applied by the Kerala High Court was held to be wrong on assumption that case fell under the last clause of S. 2 (15) of Act of 1961, which was the only part of S. 2 (15) relevant for deciding the Indian Chamber of Commerce case - Considering further that word `industry has been italicized in passage extracted above it is plain that the Court assumed that assesses was engaged in running an industry - Court have endeavored to point out that on facts of case it is impossible to hold that the last clause of S. 2 (15) has any application and that in light of the activities of respondents spread over past several years no importance can be attached to Cl. 39 of its articles of Association which enables it to do needful for promotion of industry - With great deference therefore court are unable to read decision in Indian Chamber of Commerce as overruling judgment which is under appeal before us - Court was not even apprised there that this appeal was pending against the decision of the Kerala High Court - Court are therefore of opinion strictly limiting ourselves to facts of the case and for reasons mentioned above that the income derived by assesses from kuries is exempt from taxation under S. 11 (1) (a) of the Act of 1961 - Second question presents no difficulty - Apprehension that in exercise of the power conferred by Article 39 of Articles of Association General Meeting may set apart the entire profit or a substantive part of it for reserves is unfounded - If and when affairs of the respondent take that shape Department will have ample powers and opportunity to deny exemption to respondent - For time being it is enough to state that the High Court has found that respondent has spent the income for charitable purposes - Answer to second question must therefore be that power to set apart reserves under Article 39 will not without more vitiate the charitable nature of institution - Appeals dismissed
Judgment
CHANDRACHUD, J. - The assessee in these appeals is a company which was registered under the Cochin Companies Act and later under the Indian Companies Act, 1956. The sources of income of the assessee are interest on securities, income from property and kuries or chit funds. For the assessment years 1952-53 to 1956-57, in making its returns of income, the assessee did not show the income from kuries on the ground that it was exempt under S. 4 (3) (i) of the Income Tax Act, 1922 and that the proviso to that section had no application as the business of kuries was not carried on "on behalf of a religious or charitable instruction" but was the trust business of the assessee, itself. This contention was rejected by the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal but on a reference under S. 66 (1) of the Act of 1922, the High Court of Kerala in Dharmodayam Co. v. Commr. of I.-T. Kerala, (1962) 45 ITR 478 (Ker), held that the business of kuries was itself held by the assessee under a trust for religious or charitable purposes and that it could not be said that the business was conducted "on behalf of" the religious or charitable institution. Therefore, according to the Division Bench which decided that case, the proviso to S. 4 (3) (i) was not attracted and the income from kuries in so far as it was applied for religious or charitable purposes was exempt from tax. The Revenue brought the matter in appeal to this Court but it withdrew the appeal with the result that the decision of the High Court became final.
2. The instant case arose after the Income Tax Act of 1961 came into force, the assessment year being 1968-69. The Income-tax Officer declined to grant exemption in respect of the income derived by the assessee from its kurie business but that order was set aside by the Appellate Assistant Commissioner whose judgment was confirmed by the Appellate Tribunal. These two authorities held that despite the amendment introduced by the Act of 1961 is S. 2 (15), the earlier decision would apply and the assessee was therefore entitled to claim exemption in regard to its income from kuries.
3. The Tribunal, at the instance of the Revenue, referred the following two questions for the opinion of the High Court.
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is correct in law in holding that the income derived by the assessee is exempt under S. 11 (1) (a) of the Income-tax Act, 1961?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that setting apart reserves under Art. 39 of the assessees memorandum did not vitiate the charitable purpose of the institution."
The assessee also filed two writ petitions in the High Court challenging, by one writ petition, a notice for reopening an assessment and by the other, a notice calling upon it to file a return. The High Court answered both the questions in favour of the assessee, allowed the writ petitions and quashed the notices. These appeals by special leave are directed against the judgment and orders of the High Court.
4. On the first of the two questions referred to the High Court for its opinion it becomes necessary to consider comparatively the relevant provisions of S. 4 (3) of the Income Tax Act 1922 as it existed when the Kerala High Court decided the Dharmodayam case (1962-45 ITR 478 (Ker)) on December 20, 1961 and the provisions contained in the relevant part of S. 11 read with S. 2 (15) of the Income Tax Act 1961.
5. Section 4 (3) of the Act of 1922 read thus :
"4 (3) Any income, profits or gains falling within the following classes shall not be included in the total income of the person receiving them:
(i) Subject to the provisions of Cl. (c) of sub-sec. (1) of Sec. 16, any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, in so far as such income is applied or accumulated for application to such rel
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