1986 (3) TMI 1 - SC - Income Tax

State road transport corporation entitled to income-tax exemption under 1922 and 1961 Acts as public utility

Commissioner of Income-Tax, AP Versus Andhra Pradesh State Road Transport Corporation

SC held that the state road transport corporation was entitled to income-tax exemption under the 1922 and 1961 Acts. The court found the corporation's ... State transport corporation - entitlement for exemption from income-tax under section 4(3)(i) of the Indian Income-tax Act, 1922 - definition of 'charitable purpose' in section 2(15) - HELD THAT:- It was not disputed that the object of the activity carried on by the respondent-corporation was one of general public utility. What was submitted was that such activity was carried on for profit as shown by section 22 under which the respondent-corporation was enjoined to act on business principles. It was further submitted that the respondent-corporation could issue shares even to the members of the public and that dividend would be paid to the shareholders and, therefore, profit would be made from the activity of the respondent-corporation by its owners, namely, the shareholders. We are unable to accept these submissions. There is no factual foundation for the submission based upon section 23(2) and other sections of the RTC Act which empower a road transport corporation to issue shares including issuing shares to members of the public and to pay dividend thereon. It is an admitted position, as pointed out by the High Court in its judgment under appeal, that no share capital has been raised under section 23(2) and the entire capital has been provided by the Government under section 23(1) and the Government is only paid interest thereon under section 28(1) just as interest would be paid on any money due as a debt. That the activity of the respondent-corporation is not carried on with the object of making profit is made abundantly clear by the provisions of section 30 under which, prior to the amendment of that section by the Amendment Act of 1959, the balance of income left, after utilisation of the net profits for the purpose set out in section 30, was to be made over to the State Government for the purpose of road development and after the Amendment Act of 1959 is to be utilised for financing the expansion programmes of the respondent-corporation and the remainder, if any, is to be made over to the State Government for the purpose of road development. As pointed out by this court in Andhra Pradesh Road Transport Corporation v. ITO [1964 (3) TMI 15 - SUPREME COURT], the amount handed over to the State Government does not become a part of the general revenues of the State but is impressed with an obligation that it should be utilised only for the purpose for which it is entrusted, namely, road development. It is not and cannot be, disputed that road development is an object of general public utility. Thus, we hold that the respondent-corporation was entitled to the exemption claimed by it both under the 1922 Act and under the 1961 Act. Issues Involved:1. Whether the Andhra Pradesh State Road Transport Corporation's income for the assessment years 1960-61 and 1961-62 was exempt from income-tax under section 4(3)(i) of the Indian Income-tax Act, 1922.2. Whether the Andhra Pradesh State Road Transport Corporation's income for the assessment year 1962-63 was exempt from income-tax under section 11 of the Income-tax Act, 1961.Detailed Analysis:Issue 1: Exemption under Section 4(3)(i) of the Indian Income-tax Act, 1922The Andhra Pradesh State Road Transport Corporation (hereinafter referred to as 'the respondent-corporation') claimed exemption from income-tax under section 4(3)(i) of the Indian Income-tax Act, 1922, for the assessment years 1960-61 and 1961-62. This section exempts income derived from property held under trust or other legal obligation wholly for religious or charitable purposes. The definition of 'charitable purpose' includes relief of the poor, education, medical relief, and the advancement of any other object of general public utility.The respondent-corporation argued that its income should be exempt as it was held for charitable purposes. However, the Income-tax Officer rejected this claim, and the matter was taken to the Appellate Assistant Commissioner, who allowed the appeal. The Department then appealed to the Income-tax Appellate Tribunal, which reversed the decision and referred the matter to the High Court. The High Court ruled in favor of the respondent-corporation, leading to the present appeals.The Supreme Court examined the relevant provisions of the RTC Act, particularly sections 3, 18, 22, 23, 28, and 30, to determine whether the respondent-corporation's activities were carried on for profit. The Court noted that the primary object of the respondent-corporation was to provide an efficient, adequate, economical, and properly coordinated system of road transport services, which is an object of general public utility.The Court emphasized that section 22, which mandates the corporation to act on business principles, does not imply that the activities are carried on for profit. Instead, it ensures efficient and economical management. The Court reiterated the principle established in previous judgments, such as Addl. CIT v. Surat Art Silk Cloth Manufacturers Association, that the test is whether the predominant object of the activity is to carry out a charitable purpose or to earn profit. If the predominant object is charitable, the purpose does not lose its character merely because some profit arises from the activity.The Court found that the respondent-corporation's activities were not carried on with the object of making profit, as evidenced by section 30, which directs that any remaining income after specific utilizations is made over to the State Government for road development, an object of general public utility.Issue 2: Exemption under Section 11 of the Income-tax Act, 1961For the assessment year 1962-63, the respondent-corporation claimed exemption under section 11 of the Income-tax Act, 1961. This section exempts income derived from property held under trust wholly for charitable or religious purposes, to the extent that such income is applied to such purposes in India.The definition of 'charitable purpose' in section 2(15) of the 1961 Act includes the advancement of any other object of general public utility, not involving the carrying on of any activity for profit. The Supreme Court reiterated the principle that the test is whether the predominant object of the activity is to carry out a charitable purpose or to earn profit.The Court examined the provisions of the RTC Act and found that the respondent-corporation's activities were aligned with the advancement of an object of general public utility. The Court noted that the respondent-corporation's income, after making provisions for specific purposes, was either utilized for financing expansion programs or made over to the State Government for road development.The Court concluded that the respondent-corporation's activities were not carried on with the object of making profit and were, therefore, entitled to exemption under section 11 of the 1961 Act.Conclusion:The Supreme Court held that the respondent-corporation was entitled to the exemption claimed under both the 1922 Act and the 1961 Act. The appeals were dismissed with costs, affirming the High Court's decision in favor of the respondent-corporation.