N.M. Kasliwal, J. - (1.) BOTH the above reference applications are disposed of by one single order as they relate to two different assessment years 1971-72 and 1975-76, but common question of law is involved in both these applications.
(2.) THE Commissioner of Income-tax, Jaipur, has filed these applications under Section 256(2) of the Income-tax Act, 1961 (for short "the Act", hereinafter), for giving direction to the Income-tax Appellate Tribunal, Jaipur, to state the case and refer the following question of law for the opinion of this court: , "Whether, on the facts and in the circumstances of the case, the learned Tribunal was right in law in holding that no error, much less an error which is prejudicial to the interests of the Revenue, has been established by the Revenue and, therefore, the Commissioner of Income-tax was not justified in having exercised jurisdiction under Section 263 of the Income-tax Act ?" Brief facts of the case are that the Commissioner of Income-tax passed an order under Section 263 of the Act on April 2, 1979, and another on September 15, 1979. for the two assessment years, namely, 1971-72 and 1975-76, respectively. The settlor of Anupam Charitable Trust (hereinafter referred to as "the Trust") acquired sole selling agency from M/s. Godawari Sugar Mills Ltd. and deposited security to the tune of Rs. 50,000. The settlors were to receive commission on the sale of suga.. at 1.1/8%. The settlors then created a trust on November 3, 1964, by executing a trust deed and the right to receive the commission from the sole selling agency and the security of Rs. 50,000 was created for charitable purpose within the meaning of Section 2(15) of the Act. No return was filed under Section 139(1) of the Act for the assessment year 1971-72 by the assessee-trust as it thought that the entire income accruing to it was exempt under Section 11 of the Act. The Income-tax Officer then served a notice under Section 148 of the Act on the assessee. In response to the above notice, the assessee filed its return of income on February 25, 1974. The assessment was thereafter made by the Income-tax Officer on April 7, 1977, under Section 143(3) of the Act. The Income-tax Officer treated the assessee as a charitable trust within the meaning of Section 2(15) read with Section 11 of the Act and granted exemption. The Income-tax Officer similarly granted exemption to the assessee for the assessment year 1975-76. The intervening assessments were not made at all till then. The Commissioner of Income-tax initiated proceedings under Section 263 of the Act taking the view that the assessments made by the Income-tax Officer were erroneous as they were prejudicial to the interests of the Revenue. The Commissioner of Income-tax held that the assessment orders passed by the Income-tax Officer were erroneous, as by these orders, the income which was assessable to tax had been declared to be exempt and it has resulted in loss of lawful revenue to the State. The Commissioner of Income-tax, as such, set aside the orders passed by the Income-tax Officer and gave direction to take proceedings for assessment de novo. The assessee-trust, aggrieved against the orders of the Commissioner of Income-tax, filed two appeals before the Income-tax Appellate Tribunal in respect of both the assessment years. The Tribunal held that there was no error, much less any error which might be prejudicial to the interests of the Revenue, on the facts and in the circumstances of the cases. The Tribunal further held that the Commissioner of Income-tax was not justified in having exercised jurisdiction under Section 263 of the Act. The Tribunal, as such, by order dated August 30, 1980, allowed both the appeals and set aside the orders passed by the Commissioner of Income-tax. The Commissioner of Income-tax filed two applications for making references to this Hon'ble court on the question of law referred to above, but these applications were also dismissed by the Tribunal by order dated August 31, 1981. In these circumstances, these reference applications have been filed by the Commissioner of Income-tax under Section 256(2) of the Act before this court. Shri R. N. Surolia, learned counsel for the Revenue, submitted that the learned Tribunal committed an error in holding that the assessee-trust derived income in accordance with the objects of the trust. It is submitted that the objects of the trust forbid the trustee from indulging in profit-earning activities. It was further submitted that the Tribunal committed an error in assuming without there being any evidence on record, that the assessee-trust received income by way of agency commission on sale of sugar manufactured by M/s. Godawari Sugar Mills Ltd. in specified area. It was further argued by Shri Surolia that the learned Tribunal committed an error of law in holding that the activities of the assessee-trust in diverting back income received by it and then granting it by way of loans to the donees fulfilled any charitable object of the trust. It was further submitted that the Commissioner of Income-tax had rightly held that the Income-tax Officer did not make any inquiry as to whether the sole selling agency had been renewed by M/s. Godawari Sugar Mills Ltd. in favour of the trust after April 30, 1966. The sole selling agency came to be terminated on May 1, 1969, and, as such, the same was not available to the assessee in the previous years. It was thus submitted that the income received by the assessee, having been derived from selling agency, could not be said to be property held in trust as settled by the authors of the trust. The Commissioner of Income-tax, in these circumstances, was right in giving directions to the Income-tax Officer to make inquiry and pass orders of assessment de novo before holding that the income of the assessee was exempt under Section 11 of the Act, Shri Surolia further argued that the Commissioner of Income-tax had rightly placed reliance on a decision of the Supreme Court in Dharmaposhanam Co. v. CIT [1978] 114 ITR 463. The Commissioner of Income-tax had rightly held that the authors of the trust have clearly reserved for themselves unfettered powers of utilising the income of the trust in their absolute discretion for any of the four objects mentioned in clause 5 read with clause 2 of the trust deed and such objects include the advancement of "any other object of general public utility" : whether or not they have actually exercised its powers is immaterial. Thus, the assessee-trust having also engaged itself in the advancement of any object of general public utility and involved itself in any activity for profit, the income of the trust forfeits exemption as provided in the Act. It was proved that the objects of the trust included the advancement of general public utility and it has extensively engaged in activities for profit, and, therefore, the income of the assessee is not exempt under Section 11 read with Section 2(15) of the Act.
(3.) ON the other hand, Shri S.P. Mehta, learned counsel for the assessee-trust, submitted that the view taken by their Lordships of the Supreme Court in Dharmaposhanam Company's case [1978] 114 ITR 463, has been overruled by a later decision of the Supreme Court in Addl. CIT v. Surat Art Silk Cloth Manufacturers Association [1980] 121 ITR 1. It is submitted that the entire basis of the order of the learned Commissioner of Income-tax was Dharmaposhanam Company's case [1978] 114 ITR 463 (SC), but when the Supreme Court itself in Surat Art Silk Cloth Manufacturers Association's case [1980] 121 ITR 1, has held the same to be no longer good law, the entire order, of the Commissioner of Income-tax falls to the ground and no question of law survives for the opinion of this court. It was pointed out by Shri Mehta that it was nowhere the case of the Department that the income derived by the assessee-trust has been utilised for any purpose other than charitable objects. There was a clear case of the assessee that after 1969, the assessee-trust has become the sole selling agent and continued to receive the commission income and there was no fundamental change in the character of commission income so far as the applicability of Section 11 of the Act is concerned. Shri Mehta further contended that it was nobody's case that the assessee showed income which did not belong to it. In no case, can it be said that the commission income that was declared by the assessee in the returns was not income of the trust. It has already been held in Surat Art Silk Cloth Manufacturers Association's case [1980] 121 ITR 1 (SC), that if the profit-making activity is subservient to the charitable objects of general public utility, then the exemption has to be allowed under Section 11 of the Act. There is no dispute in the present cases about the application of the income. The profit-making activity was meant for achieving the charitable object of general public utility and such profit-making activity was not an end but only a means to achieve the charitable object of general public utility. It was thus contended that the Tribunal committed no error of law and no question of law arises from the order of the Income-tax Appellate Tribunal, dated August 30, 1980. We have given our thoughtful consideration to the arguments advanced by learned counsel for the parties. The Tribunal considered the question whether there was any error in the order of the Income-tax Officer within the meaning of Section 263 of the Act and whether such error caused any prejudice to the interests of the Revenue. In order to assume jurisdiction under Section 263 of the Act, two things have to be established, (i) that there is an error in the orders of the Income-tax Officer, and (ii) that the error is prejudicial to the interests of the Revenue. ;