COMMISSIONER OF INCOME TAX JA vs. M/S JAIPUR STOCK EXCHANGE

In all these Income Tax Appeals under Section 260A of the Income Tax Act, 1961 (for short, 'the Act') filed by the Commissioner of Income Tax, for the assessment years 1995-96 to 2007-08, the substantial question of law, on which these appeals have been admitted, is as follows:- “Whether in the facts and circumstances of the case, the ITAT was justified in law and have not acted perversely in holding that the assessee respondent is a charitable institution as contemplated u/s.2(15) of the Act and is entitled for exemption u/s.11(2) and 11(1)(a) of the Act?”

The assessee-Company is a Stock Exchange, registered as Public Limited Company under the Companies Act, 1956, and is alleged to be a charitable institution under Section 12A of the Act, within the meaning of the Income Tax Act, 1961. The Jaipur Stock Exchange Limited is recognized by Stock Exchange Board of India (SEBI) under the Securities Contracts (Regulation) Act, 1956. 4. The objects set out in the Memorandum of Association, for which the Company (Jaipur Stock Exchange Limited) was established, are as follows:- “A. The main objects of the Exchange to be pursued by the Exchange on its incorporation are :

To enter into partnership or into any agreement for sharing profits, union of interests, cooperation, joint ventures, reciprocal concessions or otherwise with any person or company carrying on or engaged in or about to carry on or engage in any business of transaction which the Exchange is authorised to carry on or engage in any business or transaction capable of being conducted so as directly or indirectly to benefit the Exchange and to lend money to guarantee the contracts of or otherwise assist any person or company and to take or otherwise acquire shares and securities of any such company and to sell, hold, reissue with or without guarantee or otherwise deal with the same.

To promote any company or companies for the purpose of acquiring all or any of the properties, rights and liabilities of the Exchange or for any other purpose which may seem directly or indirectly calculated to benefit the Exchange.

To sell or dispose of subject to the provisions of Companies Act, 1956, the undertaking of the Exchange or part thereof for such consideration as the Exchange may think fit and in particular for shares, debentures or securities of any other company having objects altogether or in part similar to those of the Exchange.

To carry on business as financiers, promoters, concessionaires, managers, secretaries, treasurers, agents or managing agents and any other business which may be conveniently carried on with the above.

To encourage the settlement of disputes by arbitration, to act as or to nominate arbitrators or umpires on such terms and in such cases as may seem expedient and to provide for arbitration of all disputes in respect of all transactions relating to or arising out of or pertaining to transactions in securities and including arbitration of disputes between members and persons who are not members and to provide arbitration Tribunals, Boards, Courts and subject to the provisions of the Securities Contracts (Regulation) Act, 1956 and the Rules framed thereunder to make Rules, Bye-laws and Regulations in relation to all such arbitration proceedings and to regulate the procedure with regard to the same and for enforcement of awards.

To make, draw, accept, endorse cheques, bills of exchange, promissory notes and other mercantile or commercial instruments.

To promote the consideration and discussion of all questions affecting the business of the Exchange or of its members and allied businesses and generally to watch over and protect the interests of brokers, jobbers and investors in stocks, shares and like securities.

To give the government authorities, legislators and public bodies and other facilities of conferring with and ascertaining the views of the Exchange as regards matters directly or indirectly affecting the interests of brokers, dealers, jobbers and investors in stocks, shares and like securities.

To petition, if necessary, to the legislatures or promote deputation in relation to general and particular measures affecting the business of the Exchange, its members or investors in stocks, shares and like securities and to procure changes in law or in practice regarding the same.

To promote or oppose legislative and other measures affecting the commercial, industrial and investing interests.

To collect, acquire, preserve, disseminate and circulate statistics and other information relating to stocks, shares and like securities and to maintain a library.

To print, publish and circulate such papers, periodicals, books and daily and other periodical quotations, lists and circulars as may seem conducive to furtherance of any of these objects of the Exchange. 30.To communicate with Chambers of Commerce and other mercantile bodies throughout the world and consult and promote measures for the protection and advancement of the objects of the Exchange.

To improve and elevate the technical and business knowledge of persons engaged in or about to be engaged in trade, banking, commerce or company administration or dealing in stocks, shares and like securities or in connection therewith and with a view thereto to provide for delivery of lectures and holding of classes and to test by examination or otherwise the competence of such persons and to award certificates and diplomas and to institute and establish scholarships, grants and other benefactions.

To receive moneys, securities and valuables of all kinds on deposit or for safe custody with or without remuneration therefor and on such terms and conditions as the Exchange may deem fit; PROVIDED THAT in case of deposits from the public, it shall be in accordance with Section 58 A of the Companies Act, 1956 & Rules thereunder and as per the directions of the Reserve Bank of India from time to time; PROVIDED further that the Exchange, however, shall not carry on any banking or insurance business.

To make advances on the security of any bonds, shares or real or personal property of any kind and on such terms as the Exchange may deem fit.

To undertake or to act as Clearing House for delivery and payment of shares, stocks, debentures, government securities and otherwise both for members as well as for the investing public and do all acts either banking or financial which may be required to be done in connection with the clearing house and to perform and carry out the various kinds of business incidental to and connected therewith.

To do all or any of the above things in any part of the world and as principals, agents contractors, trustees or otherwise and by or through trustees, agents or otherwise and either alone or in conjunction with other.

To take over all the assets and liabilities of Jaipur Stock Exchange and pass necessary resolutions, to approve all the actions of and to adopt all arrangements made by the coordination committee prior to official formation of the Exchange and to enter into necessary agreements, accordingly with the parties concerned for the purposes of carrying on business of the Exchange.

To apply for and obtain from the Government of India, recognition of the Exchange as a recognised Stock Exchange for the purpose of regulating and controlling the business of purchase, sale, dealings and transactions in securities within the meaning of the Securities Contracts (Regulation) Act, 1956. 38. To use the safe deposit vaults for purposes of storage gratuitously or otherwise letting on hire and otherwise disposing of safes, strong- rooms and other receptacles for money, securities and documents of all kinds.

To make payments or disbursements out of the funds or other movable property of the Exchange for any of the purposes specified in the Rules, Bye-Laws and Regulations of the Exchange.

To facilitate the transaction of business of the Exchange by establishing, providing for and maintaining Clearing House for the members.

To apply any surplus funds available with the Exchange in promoting its objects and not to distribute the same as dividend or in any other form to the members.

To do all such other things as are incidental or conducive to the attainment of the above objects. C. Other objects are : Nil. AND IT IS HEREBY DECLARED that the objects set forth in anysub clause of this clause shall not, except where the context expressly so requires be in any way limited or restricted by reference to or inference from the terms of any other subclause or by the name of the Exchange. None of the subclauses of this clause nor the objects herein nor the powers thereby conferred shall be deemed subsidiary or auxiliary merely to the objects mentioned in the first sub-clause of this clause but that the Exchange shall have full power to exercise all or any of the power conferred by any part of this clause in any part of the world notwithstanding that the business, undertaking, property or acts proposed to be transacted, acquired, dealt with or performed do not fall within the objects of the first sub-clause of this clause. AND IT IS HEREBY FURTHER DECLARED that the income and property of the Exchange, wheresoever derived from, shall be applied solely towards the promotion of the objects set forth herein above, and no portion thereof shall be paid off by way of dividend, bonus or profits to any of the members. IV. The Liability of the Members is limited. V. Every member of the Exchange undertakes to contribute to the assets of the Exchange in the event of its being would up while he is a member, or within one year after he ceases to be a member, for payment of the debts and liabilities of the Exchange contracted before he ceased to be a member, and costs, charges and expenses of winding up and for the adjustment of the rights of the contributories among themselves, such amount as may be required, not exceeding Rs.2,500/- (Rupees Two thousand Five hundred) Only.”

The Jaipur Stock Exchange-the assessee claimed exemption under Section 11(2) and Section 11(1)(a) of the Act, and had declared the taxable income in all the assessment years as 'Nil'. It was submitted that the primary object of the assessee, as per Memorandum of Association, quoted as above, is to regulate and control the transaction of business on the stock exchange, and to establish and provide for, and manage clearing house for the transactions by the members. The assessee is not empowered to do business in stocks, shares etc. The main objects of the assesseeCompany were therefore, charitable in nature, as defined in Section 2 (15) of the Act. Section 2(15) of the Income Tax Act, defines “charitable purpose”, as follows:- “2(15). “charitable purpose” includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility: Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity. Provided further that the first proviso shall not apply if the aggregate value of the receipts from the activities referred to therein is twenty-five pakh rupees or less in the previous year.”

It was contended that the objects of the stock exchange are of general public utility. The stock exchange is not carrying out any business, nor is earning profits, for distribution to its members.

The Assessing Officer was not satisfied with the explanation, and held that the assessee's ancillary objects show that it is involved in carrying on the business. The clauses in the Memorandum and Articles of Association, may not permit the applicant to distribute income, but that, all the clauses and objects taken together are general, and permit the usage of income for non-charitable purposes. Clause B(13) of the Memorandum of Association, provides for establishing and support, or aid in the establishment and support of associations, institutions, funds, trusts and conveniences calculated to benefit

In appeal, the CIT (A) allowed the exemption under Section 11, reversing the order of the Assessing Officer, following the order of the Income Tax Appellate Tribunal, in the case of the assessee, in which such exemption was allowed for the assessment year 2000-01. 9. The Income Tax Appellate Tribunal, relying on the judgments in CIT in the case of Gonvindu Naicker Estate Vs. ACIT & Anr., 248 ITR 368 (Mad.), allowed the exemption under Section 11 of the Act.

Learned counsel appearing for the Income Tax Department submits that a close perusal of the objects, as set out in the Memorandum and Articles of Associations of the Jaipur Stock Exchange Limited, would show that the assessee is not engaged, nor is carrying out any activity, as provided under Section 2(15), for relief of the poor, education, medical relief, and the advancement of any other object of general public utility. Section 11 provides that the income from property held for charitable or religious purposes, shall not be included in the total income of the assessee. Section 12 gives the benefit of exemption to the income of trusts and institutions. Section 12 provides for conditions for registration of trusts etc. The assessee, on the basis of the comparative reading of Sections, does not fall under any of the category of charitable institutions, and is as such not entitled to claim exemption under Section 11(2) and Section 11(1)(a) of the Act.

It is submitted that the members of the assessee-Company are dealing in stocks, shares, and like securities, which shows the intention of the assessee to earn profit. The members have not associated for common charitable purpose, but for trading and profit. The assesseeCompany provides for trading facilities to individual members, and charges fees in the form of admission of dealing in stocks and shares. The trading in stocks is conducted by members as well as the authorized agents, for earning profits, and thus, the meaning of “charitable purpose”, cannot be extended to the assessee, to make the Owners' Association, (1977) 106 ITR 725 (Guj.), Additional paragraph 7, as follows:- “7. What is, therefore, required is that there must be an obligation created to spend the money exclusively and essentially on charity. In the present case, as found by the High Court, at the relevant period there was no obligation that the income from properties by the assessee was to be exclusively used for charitable purposes. It was permissible for the assessee to distribute the whole or part of such income by way of dividends amongst its shareholders. Such a prohibition was imposed only in December 1973 by the amendment of Article 103(xiv) of the Articles of Association of the assessee. In other words, prior to the said amendment introduced in December 1973, the assessee was under no legal obligation prohibiting it from distributing the income derived by it by way of dividends amongst its shareholders. On that view of the matter, it must be held that the High Court was right in holding that the assessee could not claim exemption

It is submitted that in the case of the Trusts, for finding out whether a Trust is entitled to claim exemption, on the dominant purpose of the Trust. If the dominant purpose was for religious and charitable purposes, even if the money was spent for non-charitable (1981) 130 ITR 28 (SC), the “charitable purpose” defined in Section 2(15) of the Act, was explained. It was held that the clause is a restrictive clause. The exemption must depend upon the nature and character of the activities, which the Council can undertake under the relevant provisions of the Advocates Act, 1961, under which it is constituted. The dominant purpose being to ensure quality of service of competent lawyers to the litigating public, to spread legal literacy, law reforms etc., and the benefit accruing to lawyer member, being only incidental, the dominant purpose is clearly the advancement of object of general public utility within the meaning of Section 2(15), and thus, the exemption under Section 11 is allowable.

We have gone through the objects of the Jaipur Stock Exchange Limited in the Memorandum of Association. The Jaipur Stock Exchange Limited is a Company, registered by the Income Tax Department as Charitable Trust under Section 12A of the Income Tax Act. The object of the stock exchange is not only to further the interests both of the brokers and dealers, but also the public interested in securities, to assist, regulate and control the trade or business in securities, to maintain high standards of commercial honour and integrity, to promote and inculcate honourable practices, and just and equitable principles of trade and business, to discourage and to suppress malpractices, to settle disputes, and to decide all questions of usage, custom or courtesy in the conduct of trade and business. The Memorandum of Association does not permit the profits to be distributed between the members. The profits are provided to be utilized for services of the public utility, would thus clearly fall and will qualify for exemption within the meaning of “charitable purpose”, as defined in Section 2(15) of the Act.

In our view, the question is covered by the judgment of Hon'ble Maharashtra (supra); the judgment of Delhi High Court in against the Department.”