R.P. Garg, Accountant Member -
(1.) THE appeals and cross-objection are against the orders of the Commissioner of Income-tax (Appeals) for the assessment years 1987-88,1988-89 and 1990-91. As they involve common grounds they are being disposed of for the sake of convenience by this common order.
(2.) The common dispute in all the appeals is about the exemption claimed by the assessee under Section 11 of the Income-tax Act. For the assessment year 1987-88, the claim was rejected by the Income-tax Officer by observing as under :
As regards the claim of exemption under Section 11 of the Act, the assessee relied on the decision of the Supreme Court in the case of Andhra Pradesh Road Transport Corporation. The Supreme Court in the case of A.P.S.R.T.C. have held that the income is exempt under Section 11 of the Act, 1961 on the ground that the entire capital has been provided by the Government and that the provisions of Road Transport Corporation Act, provides that the balance of income left after utilisation of the net profits for the purposes of set off under Section 30 of the R.T.C. Act was to be made over to the State Government for purpose of road development and are to be utilised for financing the expansion programmes of the Corporation. In the instant case, similar circumstances are not prevailing and the claim of the assessee for exemption under Section 11 cannot be allowable.
In appeal, the assessee's claim for exemption was accepted by the Commissioner (Appeals) by observing in para 5(ii) as under :
The purpose of the establishment of the Corporation is evident in the G.O. Ms. No. 498, cited above. It is clearly to help the weavers of the State. The appellant Corporation buy yarn from the Spinning Mills and supplies it to weavers and gets the cloth woven by them by payment of wages to them at specified rates. The cloth is sold to the public through its own outlets and other Government agencies. The promotion of the welfare of the weavers and the rehabilitation of the handloom industry are clearly objects of the general public utility and to the extent, the appellant corpn. aims at the advancement of these objects and so, it is entitled for the exemption under Section 11. As already mentioned, prima facie, the dividend clauses militates against the Corporation being a charity. However, excessive reliance on the clauses on paper may be misplaced. The clauses may have to be read in the context of the actual performance. As no dividends were declared so far and as there is also a commitment that there would be no declaration of dividends, I am inclined to agree with the remarks of the Tribunal in the case of the Infrastructure Corpn. cited above and hold that the appellant corpn. is a charity. Even the provisions of Section 11(4A) are not applicable in the present case because the work relating to the appellant corpn. is carried on mainly by the beneficiaries of the institution who are the weavers themselves. In this context, I agree with the contention made out by the learned representative in the note reproduced above. In these circumstances, I have to hold that the appellant corpn. is entitled for the grant of exemption under Section 11. I am also fortified in this view by the decision of the A.P. High Court in the case of Girijan Cooperative Corpn. Ltd. v. CIT (178 ITR 559).
(3.) IN assessment year 1988-89, the matterwas re-examined by the ITO and concluded in paras 6, 7, 8 & 9 as follows :
It is a fact that the assessee supplies yarn and other inputs to the Weavers for the manufacture of handloom cloth. The Weavers are to contribute their labour, manufacture the handloom cloth and return the finished products to the assessee. IN turn, the assessee pays them wages on piece basis. Apart from this, the assessee also purchases mill-made cloth and supply them to the various Mahila Mandals and get them stitched into ready-made garments. Here also, the stitching charges are paid at the piece rate. The assessee has also got handloom cloth dyed by paying dyeing charges to the various persons/concerns. The handloom cloth is sold through the retail out-lets and the ready-made garments were sold in accordance with the directions of the Government of Andhra Pradesh.
A scrutiny of the records reveal that the assessee was incurring losses from its inception up to and including the assessment year 1977-78. The assessee has not filed the returns for the assessment years 1978-79 to 1985-86. Therefore, nothing can be said about the trading results achieved by the assessee during these accounting years. The position for the other years is as under :
From the details given above, it may be seen that right from the assessment years 1987-88 onwards, the assessee-Corporation has earned substantial profits although no dividends have been declared so far. With regard to the assessee's contention that it has been formed for the advancement of an object of general public utility as laid down under Section 2(15) of the INcome-tax Act, it may be mentioned that all the activities of the assessee as detailed above are commercial in nature and with a view to earn profit. IN fact, it has earned substantial profits for the 3 assessment years as mentioned above. With regard to the welfare/rehabilitation of Weavers it may be mentioned that the assessee is doing nothing special other than a commercial firm which also provides yarn and other inputs to the Weavers for the manufacture of handloom cloth and pay them at piece rate for the work done. Apart from this, the assessee does no other welfare work for the work done by them. For all these reasons it has to be held that the assessee is not carrying on any object of general public utility which can fall within the ambit of Section 2(15) of the INcome-tax Act. The assessee's contention that the income of the assessee is exempt under Section 11 of the Act even after the introduction of Sub-section 4A is not tenable because the activities of the assessee is providing yarn and other inputs to the Weavers for the manufacture of handloom cloth and paying them at piece rate is purely a commercial proposition. Apart from this the assessee does no other service/welfare work for the Weavers. Further the weavers are not the shareholders of the assessee-company and no dividends/surplus has been passed on to them. Also It is noticed that apart from the manufacture of handloom cloth, the assessee is also engaged in the purchase of mill-made cloth and getting them stitched into readymade garments through the Mahila Mandals by paying them wages at piece rates and selling them readymade garments through the retail outlets. It is also noticed that the assessee has got the cloth dyed by paying dyeing charges to the various persons/concerns. All these activities would go to prove that the assessee concern is engaged in the outright commercial activities and earning substantial profits, although the same have been accumulated till to date without declaration of dividends. As pointed out above, the Weavers are the Artisans from whom the assessee gets its work done but they are not the shareholders in the assessee corporation and derive no other benefit except the wages for the work done by them. The assessee placed reliance on the decision of the A.P. High Court in the case of Girijan Co-op. Society v. CIT  178 ITR 359 and contended that the assessee is entitled for exemption under Section 11. The facts of the assessee's case are different from the facts existed in the case of Girijan Co-op. Society, as enumerated hereunder :
(i) IN the case of Girijan Co-op. Corporation Ltd., the shareholders are co-op. Stores, which are in turn constituted by the persons belonging to Scheduled Tribes as its members. Thus, the persons belonging to S. Ts are the members/shareholders/beneficiaries of the Corporation through their co-op. Societies.
(ii) The Corporation purchases products/articles from the members through its Societies and provide assistance to the members. Thus, the beneficiaries under the corporation are the persons belonging to the S.T., who are actually involved in carrying on the assessee"s business.
(iii) Also there is a provision for the declaration of dividends and the dividends are paid to the member Societies which serve their constituents, i.e., to say the members or the beneficiaries are entitled to receive/share the profits of the assessee's corporation.
IN the assessee's case, though the assessee corporation claims to have formed for the up-liftment of Weavers community, the entire capital was contributed by the A.P. State Government. That is, the weavers are not the shareholders or members and they are not entitled to dividends/surplus. Secondly, the weavers are paid remuneration by piece rate for their services similar to other job workers who were doing stitching and dyeing jobs. Although there is a provision for declaration of dividends, they have to be paid only to the Government of Andhra Pradesh, because it is the sole shareholder of the assessee. Thus the Weavers get nothing except their wages for the work done along with other workers who are doing other jobs. For these reasons they cannot be treated as the beneficiaries who are doing the assessee's business.
From the facts given above, it is clear that the Weavers who are claimed as the beneficiaries of the assessee are not doing the business of the assessee entirely and are not entitled to the profits of the Corporation. For all these reasons, the case of assessee is hit by the provisions of Section 11(4A) of the Act. As such, the assessee cannot get the exemption under Section 11.;