ALL INDIA SPINNERS ASSOCIATION OF MIRZAPUR Vs. COMMISSIONER OF INCOME TAX, BOMBAY PRESIDENCY, SIND AND BALUCHISTAN

JUDGEMENT

(1.) This is an appeal from an order dated 8 April 1941 of the High Court of Bombay (Sir J.W.F. Beaumont, C.J. and Wadia J.) answering adversely to the appellant a question contained in a reference under S. 66 (3), Income-tax Act, 1922, (hereinafter called "the Act") made by the respondent dated 20 March 1941. The year of assessment concerned is the year 1936-37 the relevant accounting year being the year ended 3lst December 1935. Throughout the accounting year and the year of assessment the appellant was an unregistered and unincorporated association of individuals. Its activities consisted in the acquisition of yarn, and also raw cotton, which was then given out to various poor people to be spun by them into yarn all of which yarn was then given out to other poor people for hand-weaving into cloth. The cloth so produced for the appellant was then sold by the appellant. During the relevant accounting year these activities resulted in a profit to the appellant. The appellant also had income from interest during the same year and the appellant was assessed to income-tax and super-tax for the year 1936-37 on the whole of such profit and income. The question at issue in this appeal is whether the appellant was for the year 1936-37, exempt from liability to income-tax and super-tax under S. 4 (3) (i) of the Act, on the ground that the whole of the profit and income in question was "income derived from property held under trust or other legal obligation wholly for charitable purposes." This depends on the true construction as applied to the facts of the case of S. 4 (3) (i) of the Act which is as follows: "(3) This Act shall not apply to the following classes of income : (i) Any income derived from property held under trust or other legal obligation wholly for religious or charitable purposes, and in the case of property so held in part only for such purposes, the income applied, or finally set apart for application thereto In this sub-section 'Charitable purpose' includes relief of the poor, education, medical relief and the advancement of any other object of general public utility."

(2.) The facts stated in the reference can be summarised as follows: The appellant was formed in the year 1925, and had its origin in a resolution of the All India Congress Committee passed in 1925. It was started for the purpose of the development of the village industry of hand-weaving (called "khadi") and the weaving of cotton material (called "khaddar") by the use of hand looms. The constitution of the appellant is set out in a document without date or signature (ex. "g" of the record) which was contained in a publication by the appellant called the "Khadi Guide," published in 1931. Clause 1 of this document is in the following terms : "Whereas the time has arrived for the establishment of the expert organisation for the development of the hand-spinning and khaddar and whereas experience has shown that such development is not possible without a permanent organisation, unaffected and uncontrolled by politics, political changes or political bodies, an organisation called the All India Spinners' Association is hereby established with the consent of the All India Congress Committee as an integral part of the Congress organisation but with independent existence and powers." Certain of the other clauses of the document read as follows: "Clause 2 (A). The said Association shall consist of members and associates and donors hereinafter defined and shall have a Board of Trustees who shall also be the Governing Body of the Association." Clause 2 (B) also contains the names of the members of the Board of Trustees and Executive Council, which included Mahatma Gandhi and Pandit Jawaharlal Nehru. "Clause 3. That the funds and assets now held by the All India Spinners' Association and its various branches shall vest in the Board of Trustees who shall also be the Executive Council of the Association, and they shall hold the same for the purpose of this Association . Clause 4. The Council shall have the right to raise loans, to collect subscriptions, to hold immovable property, to invest funds under proper security, to give and take mortgage for the furtherance of hand-spinning and khaddar, to give financial assistance to khaddar organisations by way of loans, gifts or bounties, to help or establish schools or institutions where hand- spinning is taught, to help and open khaddar stores, to establish a khaddar service, to act as agency on behalf of the Congress to receive self-spun yarn as subscription to the Congress and to issue certificates and to do all the things that may be considered necessary for the furtherance of its objects, with power to make regulations for the conduct of affairs of the Association of the Council and to make such amendments in the present constitution, as may be considered necessary from time to time."

(3.) Later clauses of the constitution stated the conditions under which persons could become members of the Association. In particular they were to be over 18 years of age, habitually wearing khaddar, and depositing regularly with the Council each month 1000 yards of self-spun yarn well twisted and uniform. The method by which the appellant worked, and the manner in which its profits were earned were as follows: Out of the funds in its hands which have mostly been contributed by donations from the public and subscriptions from the members of the Association, the Association buys charkhas and handlooms, and supplies them to the inhabitants of villages within the limits of the various branches of the Association free of charge and further buys raw cotton and gives the same to the said persons for the purpose of spinning yarn from such cotton. The Association gives a certain wage to the said persons which, in some cases, is the sole source of income to those persons and in others adds to the earnings of the said persons so as to enable them to maintain and support their families. The yarn so spun is taken over by the Association and supplied to the other persons for weaving cloth on handlooms. The Association also buys hand-spun yarn from the said persons who have spun the same out of their own raw cotton, paying them for the same on the basis of the cost of the raw cotton and the wages for spinning the same into yarn. The persons to whom all the yarn is handed over for weaving are also paid a certain wage sufficient either in itself or as an addition to the other income of the persons to maintain and support their families. The wages so paid to the spinners and weavers are not based on the current wages prevailing for similar work but are fixed on the basis of giving to the said persons as far as possible an income sufficient to enable them to support their families. The cloth so woven is taken over by the Association and is sold in the khaddar stores established by the Association in various centres by the branches of the Association. The price charged to the public for such cloth is calculated on the basis of the cost price incurred by the Association in the manner hereinbefore stated plus a certain percentage for shop and overhead charges, without any reference to or connexion with the demand for the same and the price of similar mill cloth sold in the market. In the ordinary course the monies realised by the Association by such sales are a little more or less than the cost calculated on the aforesaid basis. When there is a surplus in the amount realised by the sale of cloth, such surplus is utilised in the same manner as the other funds of the Association inter alia in getting yarn and cloth manufactured and providing wages for the persons engaged in such manufacture. The Commissioner duly referred the following question with his opinion to the High Court: "Whether having regard to the objects of the Association and the manner in which they are carried out and the purpose for which its funds are applied, the income of the Association is liable to income-tax and/or super-tax."