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PETITIONER: COMMISSIONER OF INCOME-TAXWEST BENGAL-III, CALCUTTA

       Vs.

RESPONDENT: M/S.  INDIAN SUGAR MILLS ASSOCIATION

DATE OF JUDGMENT05/11/1974

BENCH: GUPTA, A.C. BENCH: GUPTA, A.C. KHANNA, HANS RAJ

CITATION:  1975 AIR  506            1975 SCR  (2) 605  1975 SCC  (3) 479

ACT: Income Tax Act; 1922-Section 4(3) (1)-Income held wholly for religious   or   charitable  purposes   meaning   of   Trade Association  Rules  and  Regulations-Construction-Rules   of construction of wills and deeds inapplicable.

HEADNOTE: The  Indian  Sugar  Mills  Association  is  a  trade   union registered  under the Trade Unions Act, 1926.   Its  objects are, inter alia, to promote and protect the trade,  commerce and  industries  of  India  and  in  particular  the  trade, commerce  and industries connected with sugar, 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 cane growers, distributors of  sugar and other dealing with sugar mills and connected with  sugar industries,  to regulate terms and conditions of  employment in  the  mills  and factories,  to  promote  good  relations between   the  employers  and  the  employees,   to   adjust controversies  between  members of the Association,  and  to establish just and equitable principles in trade and  impose restrictive  conditions  on the conduct of sugar  trade  and business.   Rule 4(a) of the Association Provides  that  the income  and  property of the Association  shall  be  applied solely  towards  the  promotion of the  Association  and  no portion  thereof shall be paid by way of dividend  bonus  or otherwise  to  the  members of  the  Association.   Rule  64 provides  that  the  profits of  the  Association  shall  be applied  in  such a manner as the Committee  may  think  fit provided  that  no distribution of profits  amongst  members will be made without a resolution of the General Meeting  of the   Association.   It  was  claimed  on  behalf   of   the Association  that  the  business it carried on  was  in  the nature  of property held under trust or legal obligation  to apply the income for charitable purposes within the  meaning of  cl. (1) sub-section (3) of section 4 of the  Income  Tax Act,  1922 and therefore was exempted from tax.  The  income tax  authorities  and the tribunal rejected the  claim.   On reference the High Court answered in favour of the assessee. The  High  Court  held  that  the  primary  objects  of  the Association were objects of general public utility and  that the  Association  was under a legal obligation to  hold  the

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income it derived from the business for charitable purposes. It  was  of the view that section. 4 (3 )(1)  was  of  wider amplitude  than  what was known as religious  or  charitable purposes  in  English law and a purpose  of  general  public utility had to be ascertained with reference to  conceptions prevailing in our country. Allowing the appeal, HELD  : (i) In the present case no conflict  arises  between the English and the Indian concept of charitable purposes. (ii) The  exemption under s. 4(3)(1) can be claimed  if  the income is held wholly for religious or charitable  purposes; this  requirement  is satisfied if the  primary  purpose  is religious or charitable and the other purposes, not by them- selves  religious or charitable are ancillary and  serve  to achieve the main purpose. [609D-E] Commissioner  of  Income-Tax, Madras v.  Andhra  Chamber  of Commerce, 55 I.T.R. 722, followed. (iii)     Under  Rule  64 the Committee of  the  Association might  decide  to apportion the entire profits  amongst  the members  of  the Association leaving nothing to  be  applied towards  charitable objects.  Rule 64 introduces an  element of  private  gain which is inconsistent with the  object  of general public utility.  It is not possible to hold that all the  objects of the Association are charitable.   It  cannot also be held that the primary purpose of the association  is charitable  and other objects are ancillary  or  incidental. Some  of  the stated objects of the  Association  cannot  be treated as primary and others in apparent conflict with them as of no 606 effect.   It  is not therefore possible to  agree  that  the Association held the income derived from its business wholly for charitable purposes.  All India Spinners Association and Commissioner  of Income Tax, Bombay 12 I.T.R. 482  followed. Commissioner  of  Income Tax, Madras v.  Andhra  Chamber  of Commerce 55 I.T.R. 722, distinguished. [609G, 610D; 611C] (iv) Undoubtedly Rule 4(a) and Rule 64 ace repugnant to each other.  But the rule     of construction of deeds and  wills that in case of repugnancy the first words in     a deed and the last words in a will shall prevail, is not applicable to the  rules  and regulations of a registered trade  union  in order to find out its real object. [610D]

JUDGMENT: 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.  Sacthey,  for  the appellant. B.     Sea  and D. Pal, R. S. Tahore, 6. P. Khaitan,  B.  P. Mahesawari and Leila Seth, for: the respondent. The Judgment of the Court was delivered by 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 from tax under sec. 4 (3) (i)  of the Income Tax Act, 1922.  ’The assessment. years are  1958- 59,  1959-60,  1960-61 and 1961-62 for  which  the  previous years  are respectively the calendar years 1957, 1958,  1959 1960. The Indian Sugar Mills Association, hereinafter referred  to

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as  the Association, which has its office in Calcutta  is  a Trade Union registered under the Trade Unions Act, 1926; any individual, firm or company owning or managing a sugar  mill or  factory is eligible for membership of  the  Association. Rule  3 of the Rules of 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). are  as, follows               "(a)   To  promote  and  protect  the   trade,               commerce  and  industries  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    cane-growers,               distributors  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  trust  or legal obligation to apply  the  income  for charitable  purposes within the meaning of clause (i),  sub- section  (3) of section 4 of the Income-Tax Act,  1922;  the last  paragraph  of  sub-section  (3)  defines   "charitable purposes"  as  including  relief  of  the  poor,  education, medical relief and advancement  607 of  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 Association.  The  first part of Rule 4(a) reads :               "4.  (a) Subject to such special rules as  may               be  framed  for the purpose,  the  income  and               property   of   the   Association   whensoever               derived,  shall be applied solely towards  the               promotion of the Association as set forth  in-               these  Rules  and Regulations and  no  portion               thereof shall be paid cc transferred, directly               or indirectly, by way of dividend or bonus  or               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  person 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 Income 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  Association  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?" The High Court answered the question in the negative and  in favour of the assessee.  These four appeals preferred by the

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Commissioner 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  reference  and relate  to  the  assessment orders made in  respect  of  the aforesaid 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’ Association  v.  Commissioner  of Income-tax,  Bombay, 12 I.T.R. 482 and by the Supreme  Court in  Commissioner of Income-Tax, Madras v. Andhra Chamber  of Commerce,  55 I.T.R. 722.  Of the several principles  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 general  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 general 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/75 608 or  charitable  purposes  in English Law and  a  purpose  of general public utility has to be ascertained with  reference to conceptions prevailing in our country".  We are afraid we do not see how this principle has relevance on the  question under consideration in the present case because no  conflict arises  here between the English and the Indian  conceptions of  charitable purpose.  In the Spinners’  Association  case (supra)  the Privy Council found that the primary object  of the  Spinners Association was the relief of the  poor  which was  a  charitable  purpose, that the objects  of  the  said Association  included the advancement of other  purposes  of general public utility, and held that as such the income  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 profit though all  the same  it  would  subserve  general  public  utility".   This observation,  as  will appear later, has a  bearing  on  the question that arises for decision in the instant case. The  Judgment  of  the High Court is  really  based  on  the decision of this Court in Commissioner of Income-Tax’ Madras v.  Andhra Chamber of Commerce, 55 I.T.R. 722;  the  learned counsel  for the respondent also. relied almost entirely  on this  case.   The Andhra Chamber of Commerce was  a  company incorporated 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  Government  of Madras.  Of the findings 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  purpose               is  not  rendered any the less  an  object  of               general public utility.               (ii)  The expression "object of general public               utility"   is   not  restricted   to   objects               beneficial to the whole of mankind or even all

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             persons  living  in a  particular  country  or               province. it is sufficient if the intention is               to   benefit  a  section  of  the  public   as               distinguished from specified individuals.  The               section  of the public sought to be  benefited               must  undoubtedly be sufficiently defined  and               identifiable  by  some  common  quality  of  a               public  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 primary purpose be advancement of               objects  of general public utility,  it  would               remain charitable even if an incidental  entry               into  the political domain for achieving  that               purpose is contemplated.                  609 On  the  facts of that case it was held that  the  principal objects  of  the  Chamber of 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  mentioned  in  the Memorandum of Association that the Chamber of Commerce might take  steps to urge or oppose legislative or other  measures affecting trade, commerce or manufactures was pure ancillary or  subsidiary  aimed at securing the primary  objects.   In case before us the High Court held that clauses (a) and  (b) of Rule 3 of the Rules of 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 of the  income and   property  of  the  Association  was  to  be  paid   or transferred by way of dividend or bonus or otherwise by  way of profit to the members of the Association, the High  Court came  to  the conclusion that the Association  was  under  a legal  obligation  to hold the income it  derived  from  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 car charitable purposes; this requirement is satisfied, as Held in the Andhra Chamber of  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) of 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 wholly for charitable purposes.   The  general prohibition contained 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 for declaration               of  dividend and distribution of profits,  the               profits of the Association shall be applied in               such  manner  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               Resolution  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

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General  Meeting  of  the Association.  Under  Rule  64  the Committee  of  the  Association "may  in  their  discretion’ decide to apportion the entire profits among 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 610 indication that the rules framed or the resolution passed at the  general  meeting must require a part at  least  of  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 following the decision in A11 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 export of  sugar  wholly  for charitable  purposes.  This is also what  distinguishes  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 promote and  protect  the trade,  commerce  and  industries  and  to  stimulate  their development  and  its  other  objects  were  ancillary   and incidental to the principal objects. Dr.  Pal for the respondent also submitted that if  Rule  64 appeared  to  be inconsistent with-the primary  objects,  it should   be   treated  as  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 in a will shall  prevail, is  not  applicable  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   apparent conflict with them as of no effect.  Rules 3, 4 and 64,  all framed  by’ the Association as a Trade 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 the primary  objects  of  the Association  and  the  other Rules  are  all  ancillary  and incidental.  The Association is a Trade Union.  Section 2(h) of the Trade Unions Act, 1926 defines Trade Union as meaning "any  combination,  whether temporary or  permanent,  formed primarily for the purpose of regulating the relation between workmen  and  employers or between workmen and  workmen,  or between employers and employers, or for imposing restrictive conditions  on  the conduct of any trade  or  business,  and includes any federation of two or more Trade Unions:"  There is a proviso to this definition which is not relevant on the question  under consideration.  The definition  itself  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  regulate  terms  and  conditions  of               employment in the Mills and Factories.               (d)   To  promote good relations  between  the               employers and the employees.               (1)   To adjust controversies between  members               of this Association.                                    611

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             (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) also  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), (1)  and (n) of Rule 3 also fall in the same category, and it is  not possible to speak of one of them as ancillary or  incidental to  another.   These  other objects cannot  also  be  called charitable 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  therefore 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 favour of the Revenue. The appellant will be  entitled  to his costs in this Court as well as  in  the High Court.  One hearing fee. F.H.P. Appeals allowed. 612