1976 (12) TMI 37 - HC - Income Tax

Court affirms tax denial for association's profit motive, not charitable purpose

Madras Hotels Association Versus Commissioner Of Income-Tax, Madras

Madras Hotels Association Versus Commissioner Of Income-Tax, Madras - [1978] 111 ITR 241 Issues Involved:1. Validity of the Appellate Tribunal's rejection of the assessee's claim to exemption under section 4(3)(i) of the Indian Income-tax Act, 1922, and section 11 of the Income-tax Act, 1961.2. Whether the assessee-association's activities qualify as charitable purposes under section 2(15) of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Validity of the Appellate Tribunal's Rejection of Exemption ClaimsThe primary question referred to the court was whether the Appellate Tribunal's rejection of the assessee's claim to exemption under section 4(3)(i) of the Indian Income-tax Act, 1922, for the assessment years 1959-60 to 1961-62, and under section 11 of the Income-tax Act, 1961, for the assessment years 1962-63 and 1963-64, was valid in law.The assessee, a society registered under the Societies Registration Act, claimed that its income was exempt from tax on the grounds that it was a mutual association and that its objects were charitable. The Tribunal rejected these contentions, leading to the present reference.Issue 2: Charitable Purpose under Section 2(15) of the Income-tax Act, 1961The court examined whether the activities of the assessee-association could be classified as charitable under section 2(15) of the Income-tax Act, 1961. This section defines 'charitable purpose' to include relief of the poor, education, medical relief, and the advancement of any other object of general public utility not involving the carrying on of any activity for profit.The court noted that the main activity of the association was to secure permits for essential food items and distribute them to its members, who were engaged in the hotel and restaurant business. The association earned a surplus from these activities, which was brought to tax by the Income-tax Officer.The court found that the association's activities involved a profit motive, as evidenced by the surplus generated from its commercial activities. The argument that there was no sale by the association to its members was dismissed, as the distribution of commodities in bulk and the resultant surplus indicated a commercial activity aimed at earning income.The court distinguished the present case from the Supreme Court's decisions in Commissioner of Income-tax v. Andhra Chamber of Commerce and Joint Commercial Tax Officer v. Young Men's Indian Association. It noted that the objects of the assessee-association were primarily focused on benefiting its members rather than advancing any object of general public utility.The court highlighted that the Andhra Chamber of Commerce had broader objectives aimed at promoting trade and commerce in India, whereas the assessee-association's objectives were limited to representing the grievances and protecting the business interests of its members. The activities of the assessee-association were found to be inconsistent with the notion of general public utility.The court concluded that the assessee-association's activities did not qualify as charitable purposes under either the old or the new Income-tax Act. The Tribunal's finding that the association's surplus was taxable was upheld.ConclusionThe court answered the referred question against the assessee and in favor of the revenue, concluding that the Tribunal's rejection of the assessee's claim to exemption was valid in law. The assessee's activities were found to involve a profit motive and did not qualify as charitable purposes under the relevant provisions of the Income-tax Act. The court awarded costs to the respondent, fixing the counsel fee at Rs. 250.