1986 PLP (Trib (PTD)

AMJAD ALI (MEMBER).‑‑These five appeals have been directed at the instance of Department against the consolidated order of the Appellate Assistant Commissioner of Income‑tax, Range‑A, Lahore, dated the 21st July, 1980, whereby he held that the Lahore Flying Club was not liable to income‑tax. Since all these appeals involve common questions, these shall be disposed of by this single order.

2. The Lahore Flying Club, the respondent in the case, a private limited company, is registered with the Joint Registrar of Companies, under section 26 of the Companies Act, 1913, since prior to independence. Initially, the respondent did not file a return of income whereby notices under sections 34 and 22 of the repealed Income‑tax Act, 1922 were issued. In pursuance of the said notices, the respondent filed the returns declaring nil income for all the five years i. e. .1975‑76 to 1979‑80, claiming exemption from tax under section 4(3)(i) of the repealed Income‑tax Act, 1922. For the assessment years 1975‑76 and 1976‑77, the respondent was proceeded ex parte as the respondent, abstained to appear before the assessing Officer on the adjourned date of hearing despite service of notices. However, for the remaining three years i.e. 1977‑78 to 1979‑80, the assessments were made after hearing the learned Authorised Representative of the respondent and examining the books of accounts. Consequently, for the assessment years 1975‑76, 1976‑77 and 1977‑78 the respondent was assessed at the net income of Rs.50,000, Rs.60,000 and Rs.5,38,538 respectively, while for the assessment years 1978‑79 and 1979‑80, loss assessments were made at Rs.5,06,70^ and Rs.2,73,232 respectively. The respondent contested all these assessments before the learned Appellate Assistant Commissioner mainly on the ground that under the provision of section 4(3)(i) of the repealed Act, its income was exempt from tax. The ex parte proceedings taken for the assessment years 1975‑76 and 1976‑77 were also objected, to on the ground that no proper notices were served upon it. The learned Appellate Assistant Commissioner who heard the appeals accepted the plea of the respondent to the effect that no proper notices were served for the assessment years 1975‑76 and 1976‑77 and that the income of the respondent was exempt from tax under the provisions of section 4(3)(i) ibid. The department being aggrieved of the said decision of the learned Appellate Assistant Commissioner has brought these appeals praying that order of the Income‑tax Officer may be restored. Since all the appeals involve common questions, these shall be disposed of by this single order.

3. We have heard the representatives of the parties at length. It was contended by the learned Departmental Representative that the claim of the respondent of it being an educational institution was notice raised before the assessing officer, therefore, such a plea could not be' taken at the appeal stage. We do not subscribe to this view. Admittedly, it is a legal question and can be raised at any stage. Even otherwise, .it is clear from the record that on the 23rd December,) 1972, by its letter No. 230/49/LFC, the respondent had raised an issue' before the Income‑tax Officer, Central Circle‑VII, Lahore, tbat it being an educational institution was not liable to tax. There is also no denial that the tax liability was vehemently opposed before the Appellate Assistant Commissioner on the same grounds which resulted into acceptance of the plea of the respondent.

4. The learned Departmental Representative further claimed that the respondent was neither a charitable nor an educational institution. In this respect, he referred to the provisions of section 4(3)(i) and (ij) of the repealed Income‑tax Act, 1922, which for facility of reference are reproduced below:‑‑ (3) 'Subject to the provisions of this Act, any income, profits or gains falling within the following classes shall not to such extent as may be specified in this subsection or prescribed in this behalf, be included in the total income of the person receiving them:‑‑ (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 Provided that in the case of income from business this clause shall not apply unless the business is carried on behalf of religious or charitable institution and the income is applied sole); for a religious or charitable purpose of the institution, any either, (i) the business is carried on in the course of the carrying out of a religious or charitable purpose of the institution; or (ii) the work in connection with the business is mainly carried on by beneficiaries of the institution: Provided further that nothing in this clause shall apply to s much of the income, profits and gains as is not expended during the previous year or set apart for being expended within Pakistan: Provided further that if any sum out of the amount so set apart is expended outside Pakistan, it shall be included in the tot income of the previous year in which it is so expended or tl year in which it was set a part, whichever is the greater, and the provisions of subsection (2) of section 34 shall not apply to any assessment or re‑assessment, as the case may be, made or to be made in pursuance of this proviso: (ii) Any income of a religious or charitable institution derived from voluntary contributions and applicable solely to religious or charitable purposes: Provided that nothing contained in clause (i) or clause (ii) shall operate to exempt from the provisions of this Act that part of the total income of a private' religious trust which does not ensure for the benefit of the public. Explanation.‑‑The expression "charitable purposes", as used in clauses (i) and (ii), includes relief of the poor, education, medical relief and the advancement of any other object of general public utility." (4) It was, therefore, urged that to claim exemption under the aforesaid provisions the respondent shall have‑‑ (a) to be a trust or other legal obligation wholly for religious and charitable purposes; or (b) to apply its income solely for religious and charitable purposes; or (c) to derive its income through voluntary contributions and apply the same solely for religious or charitable purposes; and (d) to use its income for the poor, education, medical relief and the advancement of any other objects of general 'public utility. It was urged that, since the income of the respondent was not wholly used for charitable purposes and that Flying Club was not open to public at large as heavy amount of fees are charged from its members, if could not be said to a charitable or educational institution created for general public utility.

5. We do not agree with these contentions. Every educational institution, whether public or private cannot, particularly in this age of competition, admit every applicant. Therefore, certain conditions and qualifications have to be presence for the purpose of admission. Similarly, the Lahore Flying Club must have laid down certain‑conditions, and qualifications for the persons desiring to become its' members. These conditions, of course, would include the payment of certain fees. These fees are bound to be heavy keeping in view of the exorbitant prices of aircrafts and other training and aeronautical equipments. Hence, despite such heavy fees and strict discipline, which is exercised for admission to become a member of the club or a trainee thereof, the respondent's Club does not lose its usefulness of being an institution of general public utility. There can be no denial that at present, only the flying clubs are such institutions, which provide, or have the facility of providing, aeronautical training for commercial flying. No other institution, in the country, other than the Pakistan Air Force, has either the sources or the facilities to provide such training. Hence, for all intent and purposes, the objects of Lahore Flying Club are of general public utility.

6. Further, the fact that the Lahore Flying Club is an educational institution, it would be pertinent to reproduce below Article 3(a) and (b) of the Memorandum and the Articles of Association of the respondent's Club: ‑‑ "

3. The Club is formed for the association of persons interested in the encouragement and development of the study of aeronautics in all its branches and for that purposes:‑‑ (a) To provide a centre of information and advice on all matters pertaining aeronautics. (b) To instruct Members of the Club and others in the art of flying and in the science of aeronautics and all matters connected there with and to issue Certificate of efficiency relating thereto." These objects clearly prove that purposes of the establishment of Flying Club are to be promote and provide training facilities in the art of flying and science of aeronautics. In other words, its objects are identical to specialised educational or training institutions. Therefore, by virtue of the definition of the expression 'charitable purposes', the Lahore Flying Club clearly qualifies to be called a charitable institution.

7. There is also no dispute that the respondent does derive incomes by providing aircrafts on loan and undertake similar business, such as', air spray of pesticides or medicines, distribution of advertising bills, providing of joy rides, etc. But all these activities do not deny the respondent to claim exemption from tax as available to an educational institution. It was also contended by the learned counsel for the respondent that the Club has no paid up capital and all profits earned by it are kept in a General Reserve. Similarly, no dividends are distributed amongst its members. In this respect, the learned counsel for the respondent also produced a copy of the audited Balance Sheet for the assessment year 1977‑78 showing that the profits of company were credited in the General Reserve. Attention in this respect was also drawn to Article 6 of the Memorandum and the Articles of Association of the Club. For facility of reference the relevant extract of the said Article is reproduced below:‑‑ "

6. The income and the property of the Club whensoever derived shall be applied solely towards the promotion of the objects and purposes of the Club and no portion thereof shall be paid or transferred directly or indirectly by way of dividend bonus or otherwise to any member of the Club, except that nothing herein contained shall prevent in good faith of the out‑of‑pocket expenses incurred on behalf of the Club to or of the remuneration of any member of the Club in return for services rendered to the Club."

8. These provisions clearly establish that the profits of the respondent's Club are solely used for furtherance and promotion of the objects of the Club, which as discussed above is a charitable institution. Therefore, the profit derived through business whether in the form of fees or for providing aeronautical services to advertising agencies, business concerns, Government authorities or general public would be exempt from tax. In this respect, we also draw support from a decision of the Supreme Court in Hamdard Dawakhana v. CIT, Karachi P L D 1980 S C

84. In that case it was held by the Supreme Court that:‑‑ "The term 'property' as used in clause (i) of subsection (3) of section 4 of the Income‑tax Act includes business; that this clause deals with property, including business, held wholly or partly under trust for religious, or charitable purposes, and that income derived from such property or business is exempt from taxation to the extent of its dedication and application."

9. In this connection, the learned counsel for the respondent also referred to Notification No. S.R.O. 1941(K)/61, dated the 31st October, 1961, issued under section 60(1) of the repealed Income‑tax Act, 1922, which provides that the income of the university and other educational institutions shall be exempt from levy of tax. Even otherwise, the very fact that the Lahore Flying Club was registered under the provisions of section 26 of the Companies Act, 1913, it confirms its status of being a charitable institution. It requires no clarification that registration under the said provisions is accorded only when "it is proved to the satisfaction of the Federal Government that an association capable of being formed as a limited company has been or is about to be formed for promoting commerce, art, science, religion, charity, or any other useful object and applies or intends to apply its profits (if any) or other income in promoting its objects, and prohibits the payment of any dividend to its members."

10. Since no part of respondent's income is used except for promotion of its objects, which are educational or in legal terminology are 'charitable', such income shall be exempt from tax. Hence, we affirm the findings of the learned Appellate Assistant Commissioner that the income of the respondent is exempt from levy of tax by virtue of the provisions of section 4(3)(i) of the repealed Income‑tax Act, 1922. In view of the fact that the respondent is not liable to tax, we need not discuss the issue whether the ex parte proceedings taken against 'the respondent for the assessment year 1975‑76 and 1976‑77 were justified or not.

11. In the result, all the five appeals preferred by the Department are dismissed. M. Y. H. Appeals dismissed.