Gujarat High Court
Commissioner Of Income-Tax vs Adarsh Co-Operative Housing Society ... on 26 October, 1994
Equivalent citations: [1995]213ITR677(GUJ)
JUDGMENT Susanta Chatterji, J.
1. The Income-tax Appellate Tribunal, Ahmedabad Bench "C" (hereinafter referred to as the Tribunal), at the instance of the Commissioner of Income-tax Baroda has referred the following question for the opinion of the High Court :
"1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in coming to the conclusion that the assessee can be regarded as a mutual body and as such its income is not liable to tax ?
2. Whether, on the facts and in the circumstances of the case the Appellate Tribunal was right in coming to the conclusion that the amount received by the assessee from its members on allotment of lands by lease was not liable to be taxed on the principles of mutuality ?
3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in coming to the conclusion that the amount received by the assessee being 50 per cent. of the excess amount from its members on transfer of lands by such members was not liable to be taxed as income of the assessee ?"
2. It transpires from the material on record that the assessee is a co-operative society registered under the Bombay Co-operative Societies Act, 1925 (hereinafter referred as "the Act"). The said society acquired from the Government of Bombay a licence of land extending to about 20 acres. In the year 1950, the said society itself and purchased about 37 acres of land. All the said land was fully developed by the society laying roads and making provisions for various civic amenities. The society allots plots of land and leases out the same to its members for a period of 998 years. A certain amounts was collected from the individual members when they executed the lease deeds in favour of the assessee-co-operative society. In appropriate cases, the society permitted disposition or devolution of the lease of any plot with any building thereon under its regulations from any existing member to another who registered himself as a member of the society. On such transfer of lease, the existing member to whom the plot was leased had to pay the society half of the premium amount if any received by him from the purchaser. During the previous year relevant to the assessment year 1971-72, the assessee received a sum of Rs. 23,600 on allotment of plots by lease to the members and a sum of Rs. 40,335 being the half share of the excess received by members on transfer of the lease from themselves to others. Returns and revised returns were field for the assessment year and the Income-tax Officer concerned brought the aforesaid amounts to tax. It was found, inter alia, that the co-operative society was carrying on the business of providing houses to its members which involved incidental activities like buying and selling of land transfer of land providing loans to members for constructions of houses, the society itself constructing the houses, etc. The activity of transfer of lease resulting in half the excess being received by the assessee also constituted part of the society's business. It was interpreted as income of the society under the head "Other sources".
3. The Appellate Assistant Commissioner, however, accepted the claim of the assessee as to the non-taxability and allowed the appeals finding that the land was purchased long back some time in 1960 and the plots were leased out for 998 years and the society is taking a lump sum amount fixed by the managing committee from time to time. Technically the ownership remains with the society.
4. Against the judgment of the appellate authority, an appeal was preferred before the Tribunal. The Tribunal by a detailed judgment after referring to several reported decisions, held that any receipt arising out of a capital asset will not be liable to tax as a revenue receipt. It was found by the Tribunal that the society eager to retain and continue all its members as members can scarcely forecast when a member would transfer his lease to another or whether he would ever do so; that there is on certainty that the transfer would result in an excess and not a deficit for the transferor. Both types of receipts were found not taxable in the hands of the assessee. The appeals preferred by the Revenue authorities were dismissed. In the background of such facts and circumstances the above questions have been referred for the opinion of the High Court.
5. Mr. Mihir Thakore, learned counsel appearing for the applicant Revenue, has argued at length that in the facts and circumstances of the case, the Tribunal has committed a grave error in not appreciating the principles of law which can be applicable to the facts of the case for effective adjudication of the matter in dispute. Our attention has been drawn to the decision in the case of Municipal Mutual Insurance Limited v. Hills (H. M. Inspector of Taxes) [1932] 16 TC 430 (HL). At page 444, it has been considered that the question at issue was whether the annual surplus arising from employers' liability insurance or miscellaneous insurance business done with fire policy holders forms profits and gains subject to income-tax. So far as the facts of that case are concerned, it will appear that the main business of the company was that of fire insurance, but since 1913, a progressively increasing miscellaneous business had been undertaken. In 1918, the company started the business of employers liability insurance which had developed on an extensive scale. It is stated that they were exempted by the board of trade from the statutory deposit in respect of the latter business on satisfying the board that their business under that head was that of mutual insurance of the members. By 1922, the annual net premiums both from the miscellaneous business and from the employers liability business exceeded those from the fire business. Thereafter about one-half of the policies issued by the company were held by fire policy holders on the fire policy register and one-half and one-half by other persons, and about one-quarter of the total net premiums received by the company were paid in respect of fire policies. In view of such facts, it was held that the surplus on employs liability and miscellaneous business done with fire policy holders did not arise from mutual insurance.
6. Mr. Mihir Thakore, by reference to the said decision developed his arguments that the facts of the present case do not indicate the existence of "mutuality". The original contributor making the contribution walks out; that there is cession of mutuality. While developing his points of submission he has relied upon the decision in the case of CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241; AIR 1965 SC 96. In the said case the assessee, a mutual benefit fund was a company incorporated under the Companies Act, 1882, and was limited by shares, Since 1938 the nominal capital of the assessee was Rs. 33,00,000 divided into share of Re. 1 each. It carried on banking business restricted to its shareholders i.e., the shareholders were entitled to participate in the various recurring deposit schemes of the assessee or to obtain loans on security. Out of the interest realised by the assessee on the loans which constituted its main income, interest on the recurring deposits aforesaid was paid as also all the other outgoing and expenses of management and the balance was divided among the members pro rata according to their shareholding after making provision for reserves, etc., as required by the memorandum or articles. The shareholders who were thus entitled to participate in the profits need not had either taken loans or had made recurring deposits. The question was whether the assessee was a banking concern assessable under section 10 of the Act. It was held that it would be difficult to hold that Sales case [1889] 2 TC 460 (HL) applies to the facts of the said case. It was found that a shareholder in the assessee-company was entitled to participate in the profits without contributing to the funds of the company by taking loans. He was entitled to receive his divided as long as he held a share. He was not to fulfil any other condition. His position was in no way different from a shareholder in a banking company, limited by share. It was observed that the position of the assessee was no different from an ordinary bank except that it lends money to and receives deposits from its shareholders; this does not by itself make its income any the less income from business within section 10 of the Indian Income-tax Act, 1922. Accordingly, the answer to the question referred to the High Court was given in the affirmative and the income was not exempt from taxation.
7. By referring to the decision in the case of English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. of Agrl. I.T. [1948] 16 ITR 270 (PC), it was argued that the principle of Styles' case [1889] 14 AC 381; [1889] 2 TC 460 (HL) cannot be applied to an association, society or company which grows produce on its own land or manufactures goods in its own factories, using either its own capital or capital borrowed whether from its members or from others and sells its produce or goods to its members exclusively. Our attention has been drawn to the said case in depth and detail. In the said case the appellant, the English and Scottish Joint Co-operative Wholesale Society Ltd., incorporated in the United Kingdom under the Industrial and Provident Societies Act, 1893, had as its objects, the carrying of the business of planters, growers, producers, merchants and manufacturers and brokers of tea. The society consisted of two members and it owned a tea estate where tea was grown and manufactured. Except a small portion of the produce, the society's output of tea was sold to its two members at market rates. Each year the members paid to the society, by way of advances, sums of money to meet the cost of tea to be supplied and the market prices of tea supplied to them were debited against these payments, The supplies were recorded as sales to the members. Out of the proceeds from the sales, the expenses of production and management and the interest on loans were paid or provided. Under the rules of the society, its net profits were applied : (a) in depreciation of land, building, live and rolling stock; (b) payment of interest not exceeding six per cent. per annum on the share capital; (c) appropriation to a reserve fund; (d) appropriation to a special fund for making grants as determined in general meeting; (e) payment of a dividend to members rateable in proportion to the amount of purchases made by them from the society; And (f) the remainder, if any, carried forward to the next account. The contention of the society was that it was a mutual association whose transactions with its members were incapable of producing a profit and it was not, therefore, liable to be assessed under the Assam Agricultural Income-tax Act. In the aforesaid facts, it was held that the society was not exempt from liability to Assam agricultural income-tax in respect of profits from the said to its members of tea cultivated or manufactured at its estate. Our specific attention is drawn to the observations made at page 280 of the aforesaid judgment where, the case of Thomas v. Richard Evans and Co. Ltd. [1927] 1 KB 33 was held by Rowlatt J., to fall within the principle of Styles' case [1889] 2 TC 460 (HL). The association was a purely mutual assurance association and the contributors and the assured persons were identical bodies; and surplus of contributions over payments to policy-holders was ultimately returned to contributors. Rowlatt J., has observed as under :
"Where all that a company does is to collect money from a certain number of people - it matters not whether they are called members of the company or participating policyholders - and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then as I understand Styles' case [1889] 2 TC 460 (HL), there is no profit. If the people were to do the thing for themselves, there could be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference; there is still no profit. This is not because the entity of the company is to be disregarded; it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it."
8. Mr. Mihir Thakore, learned counsel has emphasised that the principle of Styles' case [1889] 2 TC 460 (HL) which has been quoted in depth and detail in the case of CIT v. Shree Jari Merchants Association [1977] 106 ITR 542, by the Division Bench of this court has considered that the leading and often quoted case on the subject of "mutuality" is the English case of Styles v. New York Life Insurance Co. [1889] 2 TC 460 (HL). The ratio of the said decision is stated by Lord Normand in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. of Agrl. I.T. [1948] 16 ITR 270 (PC). Relying on the said decisions, it was found by the Division Bench of this court in the aforesaid case that Shree Jari Merchants Association [1977] 106 ITR 542, the assessee was an association registered as a trade union under the Trade Unions Act, 1926. The association was not a trading association. It was only a trade association which did not work for profit but did work for the common good of its members and for preservation of the business interest of jari industry. For the assessment years 1962-63 to 1964-65, the Appellate Tribunal held that the assessee was a "mutual concern" and the annual subscription and the entrance fee received by it from its members did not fall within the ambit of the definition of the word "income" and since the surplus of the assets of the assessee after deducting the expenditure was to be returned to the members, the said surplus was not liable to tax. On a reference at the instance of the Revenue, it was held that a mutual association is an association of persons who agree to contribute funds for some common purpose mutually beneficial and receive back the surplus left out of those funds in the same capacity in which they made the contributions. Thus, they receive back what was already their own. They contribute not with an idea to trade but with an idea of rendering mutual help. The receipt which comes back in their hands is not a profit, because no man can make a profit out of himself. Thus, the main test of mutuality is complete identity of the contributors with the recipients. If such a mutual concern receives any income, the surplus of which goes back to those who contributed the said income, it is not liable to tax because, on account of the operation of the principle of mutuality, the income remains, in reality, the income of the contributors. According to rule 38 of the Constitution of the assessee-association, the surplus assets of the assessee shall, at the time of its dissolution, be used in the manner proposed in the resolution passed by the association. Apparently, any resolution which might come up for consideration in future would not necessarily provided for the distribution of the surplus assets only amongst the members of the association. In case the assets of the association are not liable to be returned to the members, the identity between the contributors and the recipients would be lost. This would militate against the very basic principle of mutuality. This was, therefore, not a case which would be governed by the principles of Styles' case [1889] 2 TC 460 (HL). The assessee was not a mutual concern and could not claim exemption from tax on that ground.
9. By referring to the aforesaid decisions and the facts of the present case, the contention of learned counsel for the Revenue is that no relief is available to the assessee as found by the tribunal and the appellate authority. It is submitted that looking to the principle of Styles' case [1889] 2 TC 460 (HL) and the applicability of the same to the facts of the present cases, as found in the case of Shree Jari Merchants Association [1977] 106 ITR 542 (Guj), there is no mutuality and the relief sought for by the assessee cannot be granted.
10. The learned Advocate-General, appearing on behalf of the respondent-assessee, has advanced a very lengthy argument indeed. He has submitted that the principle of law should not be considered in a narrow sense of the term. The very principle as found by the reported decisions should be considered in the facts and background of each case and in the proper perspective. By referring to the decision in the case of Thomas v. Richard Evans and Co. Ltd. [1927] 11 TC 790 (HL), it was argued that in the said case, the respondent-association was incorporated under the Companies Act as a company limited by guarantee for the purpose of indemnifying its members (who are all coal owners) and its members only, against liability for compensation in respect of fatal accidents to workmen in their employment and for this purpose, it has powers to accumulate funds. There were no shareholders. But the members of the company, viz., those protected by it, were each liable to contribute a sum not exceeding 25 Pounds in the even of its being wound up. The founds of the association were built up from contributions made by its members in proportion to the wages respectively paid by them. "Ordinary calls" which are made annually upon the members are paid into the general fund, which is the primary fund for the payment of the company's liabilities for compensation and other expenses and each year the surplus in that fund was transferred to the reserve fund to which "extraordinary calls" made upon the members were also credited. When recourse was necessary to the reserve fund that fund was to be deemed to belong to the members in the proportions of their respective contributions thereto computed as prescribed, and the share in this fund of a member was returnable to him in whole or part on the winding up of the company or his own retirement. The rights of a member could not be transferred except to a person succeeding to or taking over a protected mine or works, and a member remained liable for claims which accrued before he actually retired. The association was assessed to income-tax under Schedule "D" in respect of the surplus of the calls received from members and the income from its investments, over its outgoings by way of indemnity payments and reinsurance and other expenses, but the Special commissioners on appeal discharged the assessment. The respondent-company in the first case therein was a member of the association and claimed a deduction in arriving at its business profits for income-tax purposes of the full amount of the calls paid by it to the association. The Special Commissioners on appeal allowed the deduction. In those circumstances, it was held : (1) in the Court of Appeal, that the payments made to the association by members were entirely premiums for insurance and were admissible deductions in computing the members' profits for assessment to income-tax, notwithstanding that such payments were partly applied in accumulating a fund which might in certain events be returnable to them wholly or in part; (2) In the House of Lords, that the surplus of the association's income from calls on its members and from its investments over its expenditure in meeting claims and reinsuring its risks did not constitute profit arising from a trade carried on by the association and that it was accordingly not liable to income-tax in respect thereof. In the said case also the decision in Styles' case [1889] 2 TC 460 (HL) was followed.
11. Learned counsel for the respondent-assessee has taken this court through the orders of the Appellate Assistant Commissioner and the order of the Tribunal and has also taken this court through the principles enunciated in the aforesaid cases and also referred to a decision in the case of CIT v. Apsara Co-operative Housing Society Ltd. [1993] 204 ITR 662 (Cal). The Division Bench of the Calcutta High Court, after considering the decisions in the cases of CIT v. Madras Race Club [1976] 105 ITR 433 (Mad); CIT v. Shree Jari Merchants Association [1977] 106 ITR 542 (Guj); CIT v. Darjeeling Club Ltd. [1985] 153 ITR 676 (Cal) and the Full Bench decision of the Patna High Court in CIT v. Bankipur Club Ltd. [1992] 198 ITR 261 observed in connection with the transfer fee realised by the society for transfer of flats by the co-operative housing society, that the persons have to first become members of the society before they can be entitled to get flats transferred in their names or become liable to pay transfer fees and that the transfer fee realised is for the benefit of the members of the society. The society is a "mutual concern" and the transfer fee is not income liable to tax. In that case the assessee, a co-operative housing society, which provided residential apartments to the members of the society received a transfer fee amounting to Rs. 45,870 for transfer of flats in the assessment year 1984-85. The Assessing Officer held that the receipt was taxable as income and, after deducting the administrative expenditure of the assessee estimated at Rs. 5,000, he included a sum of Rs. 40,870 as the assessee's income under the head "Other sources". The Commissioner (Appeals) held that persons became members of the co-operative housing society first before they were entitled to get the flats transferred in their names or were liable to pay the transfer fees, that there was an element of mutuality in respect of the transfer fees and that, therefore, the receipt could not be subjected to tax. The Tribunal upheld the order of the Commissioner (Appeals) on the ground that there was no profit element in the transaction, that the assessee-society, under its regulations or bye-laws, realised the transfer fee from a member when the member intended to transfer the flat to any other person, member or otherwise and the transfer fee was meant for the benefit of the members of the society and not for business purposes. On a reference being made, the Calcutta High Court held that in the said case, the members formed themselves into a co-operative society for the purpose of having a co-operative housing society and there was no question of any profit element in such an association or in having a transfer fee. The assessee-co-operative society was a mutual concern. Therefore, the transfer fee received by the assessee for transfer of flats was not taxable income of the assessee. According to learned counsel appearing for the respondent-assessee, the facts of the present case are very much similar to the facts of the case in the case of Apsara Co-operative Housing Society Ltd. [1993] 204 ITR 662 before the Calcutta High Court, wherein the Calcutta High Court also considered the decisions in the case of Shree Jari Merchants Association [1977] 106 ITR 542 (Guj) and accordingly the answers have been given.
12. The entire spirit of the argument of learned counsel for the respondent-assessee is that, in the case of a co-operative housing society, there is a mutual concern and by making the contribution there is no walk out of the original member and by applying the principle of Styles' case [1889] 2 TC 460 (HL), there may be on liquidation the consequence thereof be one of the factors but such a factor does not stand in the way of looking into the feature of each and every case to appreciate the scope of "mutuality". Mutuality never ceases to exist and the tax relief as sought for by the assessee on all grounds is justified that the principle of Styles' case [1889] 2 TC 460 (HL) is squarely applicable to the facts of the present case.
13. We have heard learned counsel for the respective parties. To appreciate the question in the proper perspective we find the principle, as to the "mutuality" in the English cases, is effective. The decision in the case of Styles v. New York Life Insurance Co. [1889] 2 TC 460 (HL) is very important. The ratio of this decision is stated by Lord Normand in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. of Agrl. I.T. [1948] 16 ITR 270 (PC). For proper appreciation the ratio of the decision is quoted hereinbelow (at page 279) :
"From these quotations it appears that the exemption was based on : (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated, as a mere entity for the convenience of the members and policyholders, in other words as an instrument obedient to their mandate, and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves."
14. This ratio in the English case has been reviewed by the Supreme Court in the case of CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551. In the said case the principle of law and/or ratio of the decision in Styles' case [1889] 2 TC 460 (HL) was accepted and in view of the facts and circumstances of the case, the principle of Styles' case [1889] 2 TC 460 (HL) could not be applied to the incorporated company which carried on the business of horse racing and realised money both from members and from non-members for the same consideration, namely, by the giving of the same or similar facilities to all alike in course of one and the same business carried on by it. In appreciating the principle laid down in Styles' case [1889] 2 TC 460 (HL), the Supreme Court observed that the appellant in that case was an incorporated company. The company issued life policies of two kinds, namely, participating and non-participating. There were no shares or shareholders in the ordinary sense of the terms but each and every holder of a participating policy became ipso facto a member of the company and as such became entitled to a share in the asses and liable for a share in the losses. A calculation was made by the company of the probable death rate among the members and the probable expenses and liabilities and calls in the shape of premia were made on the members accordingly. An account used to be taken annually and the greater part of the surplus of such premia over the expenditure referable to such policies was returned to the members, i.e., (holders of participating policies), and the balance was carried forward as fund in hand to the credit of the general body of members. The question was whether the surplus returned to the members was liable to be assessed to income-tax as profits or gains. The majority of the Law Lords answered the question in the negative. It will be noticed that in that case the members had associated themselves together for the purpose of insuring each other's life on the principle of mutual assurance, that is to say, they contributed annually to a common fund out of which payments were to be made, in the event of death, to the representatives of the deceased members. Those persons were alone the owners of the common fund and they alone were entitled to participate in the surplus. It was, therefore, a case of mutual assurance and the individuals insured and those associated for the purpose of meeting the policies when they fell in and receiving the surplus, were identical and it was said that the identity was not destroyed by the incorporation of the company. Lord Watson even went to the length of saying that the company in that case did not carry on any business at all, which perhaps was stating the position a little too widely as pointed out by viscount Cave in a later case; but, be that as it may, all the noble Lords who formed the majority, were of the view that what the members received were not profits but were their respective shares of the excess amount contributed by themselves.
15. By looking at the principles laid down in Styles' case [1889] 2 TC 460 (HL), a leading English case, and the acceptance of the said principles by the Supreme Court in the case of Royal Western India Turf Club Ltd. [1953] 24 ITR 551, we have to find out as to whether in the facts and circumstances of the present case, the test of "mutuality" is satisfied or not and in that light the questions referred to this court will have to be answered.
16. We have also considered the scope of section 115 of the Gujarat Co-operative Societies Act, 1961, as is applicable in the present case. Section 115 of the said Act, which is relevant, is quoted hereunder :
"115. Any surplus assets, as shown in the final report of the liquidator of a society which has been wound up, shall not be divided amongst its members but shall be devoted for any object or objects provided in the bye-laws of the society, if they specify that such a surplus shall be utilised for the particular purpose. Where the society has no such by-law, the surplus shall vest in the Registrar, who shall hold it in trust and shall transfer it to the reserve fund of a new society registered with a similar object, and serving more or less an area which the society to which the surplus belonged was serving :
Provided that, where no such society exists or is registered within three years of the cancellation of the registration of the society whose surplus is vested in the Registrar, the Registrar may distribute the surplus in the manner he thinks best, among any or all of the following :
(a) an object of public utility and of local interest as may be recommended by the members in general meeting held under section 114 or where the society has ceased to function and its record is not available or non of its members is forthcoming, as the Registrar thinks proper;
(b) a federal society with similar objects to which the cancelled society was eligible for affiliation or, where no federal society exists, the Gujarat State Federal Society; and
(c) any charitable purpose as defined in section 2 of the Charitable Endowments Act, 1890."
17. The question comes up for consideration whether there is any statutory bar and/or impediment for the concept of "mutuality" in the co-operative society. However, we are not called upon to consider this aspect having its large impact. Confining ourselves to the scope of the facts of the present case and the questions referred to this court in the present reference, we find that section 115 of the Gujarat Co-operative Societies Act, indicates, inter alia, that any surplus assets, as shown in the final report of the liquidator of a society which has been wound up, shall not be divided amongst its members but shall be devoted for any object or objects provided in the bye-laws of the society if they specify that such a surplus shall be utilised for the particular purpose. Where the society has no such bye-law, the surplus shall be vested in the Registrar who shall hold the same in trust and shall transfer it to the reserve fund of a new society registered with a similar object and serving more or less an area which the society to which the surplus belonged was serving. The scope as emphasised under section 115 of the aforesaid Act gives room for various consequences at the time of liquidation of the co-operative society. The fund may be expended for the benefits of the members. If the scheme is considered in the proper perspective, we may appreciate that the principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. This aspect has been well considered in the case of Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241 (SC). In distinguishing the facts of the case in Royal Western India Turf Club Ltd. [1953] 24 ITR 551, 560 (SC), the Supreme Court has laid down the following principle (at page 246 of 53 ITR) :
"The principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing per se to prevent a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does not come back to them as persons who had contributed them. Where a company collects money from its embers and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members."
18. If the principle of law as to mutuality as found in Styles' case [1889] 2 TC 460 (HL) is considered in a broader horizon and the scheme under section 115 of the Gujarat Co-operative Societies Act as stated above, is looked into, the scope for reconciliation with the consequences after the dissolution or liquidation would be constituted as one of the main factors but the same is not to be construed as a sine qua non to hold about mutuality and in particular in the background of the facts and circumstances of the present case.
19. Looking at the position of law as discussed above, the law appears to be well-settled that where the assessee is found to be a mutual concern, the income which it receives from its members is not liable to tax. This is founded on the principle that no one can make a profit by transacting with oneself. The primary condition of mutuality between the assessee and its members is that the assessee which collects money from its members, must apply the same for their benefit not as shareholders having interest in its profit but as persons themselves who have put up the fund by contributing to it. There must be a thread of agency for acting for the contributors for achieving the objectives. In this connection, the observations of the Supreme Court in the case of Royal western India Turf Club Ltd. [1953] 24 ITR 551 are very much relevant.
20. For arriving at any conclusion as to the question of "mutuality" between the assessee and its members, the consistent tests applied since Styles' case [1889] 2 TC 460 (HL) have already been summarised. What is really required is that all the participants must contribute to the fund as against merely being entitled to contribute. It is also not necessary that the participants in the surplus need be the same individuals who have contributed but they must bear the same character, namely, contributor member. A person who transfers his interest in the land acts while he is member. It is only in his character as member that he incurs liability to contribute to the society's fund to the extent provided in the bye-laws, subject to which only he was entitled to derive benefits. The contribution on the happening of the event is a must and is not mere entitlement to contribute at his discretion. Therefore, the argument that contribution is not by a member who could participate in the surplus is of no consequence and deserves to be rejected. It is to be noticed at pain of repetition that the identity of the individuals as contributors and participants is not essential but what is essential is the identity of character as contributors and participants. When a person transfers his interest in land, the transferor goes out after paying the contribution and the purchaser enters as member in his place to derive the benefit of expenses incurred by the society. It is to be appreciated in this connection that there is room for change of the name of the member not only at the time of transfer but also in the case of devolution after demise of the original member. What is to be reckoned is that the character of the contributor does not cease to exist in view of the nature of the enactment vis-a-vis the scheme of the Act and the principle of "mutuality" as propounded in Styles' case [1889] 2 TC 460 (HL), a leading English case, as discussed earlier. Though it is contended that there is no participation in surplus by the members because the surplus, remaining with the society in case of its cancellation does not return to contributors but is to be utilised for public purposes, the question which arises is : what is meant by "return" of what has been contributed to a common fund ? does it mean return of the corpus of the fund or does it include retention of control over the corpus to be used in consonance with the statute regulating the association, company or society, as the case may be ? It is to be noticed that as per the findings of the Revenue authorities the amount which is contributed by the outgoing member is in turn utilised by the society for extending common amenities to the members. Thus, according to this finding, the surplus in any particular assessment year is utilised for extending amenities to members in succeeding years. That is to say, such surplus during the existence of the society returns to the members by way of deriving benefit from the amenities provided by the society to its members by expending the surplus. If the inquiry is limited to assessment year concerned, the test of return of the surplus to the contributors, viz., members is satisfied on the Revenue authorities' own finding which is not in dispute.
21. Our attention has been drawn to section 52 of the Bombay Co-operative Societies Act and section 115 of the Gujarat Co-operative Societies Act, 1961, which prohibits division of surplus assets amongst its members. That is to say, the corpus of fund is not divisible as such pro rata between the members on the winding up of the society. However, that statute also provides that such surplus shall be devoted to any object or objects provided in the bye-laws of the society if they specify that such a surplus shall be utilised for the particular purpose. Under bye-law No. 71 such surplus as is available after paying encumbrances is to be used for public purposes as resolved by the general meeting called for the purpose and as approved by the Registrar.
22. From the scheme of the Gujarat Co-operative Societies Act, contained in sections 114 and 115 and bye-law 71, it is apparent that the control and power to use the surplus left after paying the encumbrances remaining the members contribution (sic). It is only on their failure to exercise such power that the surplus vests in the Registrar for being used for some public purpose and not otherwise. The phrase "return of the surplus to contributors" in the context of regulatory provisions as opposed to voluntary act of parties, cannot be construed in the narrow sense of division of the corpus, where the body of the members as a whole retains the power and control over utilisation of surplus left at the time of dissolution or winding up, though division of the corpus is prohibited. It is return of the corpus to the members for their use. It is not the requirement that return of the corpus to the members must be only for the purpose of division. The fact that the members may in future abandon their power and may allow the surplus to be a vested in the Registrar cannot be a decisive factor in determining the present status of "mutuality". What is of the essence is : what are the ordinary consequences envisaged by members within the framework of the stature to deal with the surplus ? the right of the members to deal with the surplus is not destroyed but is only restricted to the extent that instead of dividing the corpus pro rata, it has been confined to utilisation or expending of the surplus for the objectives as per their own decision. This does not detract from the concept of return of the surplus to members which they have contributed in making that fund. Although much emphasis was laid on the decision in the case of Shree Jari Merchants' Association [1977] 106 ITR 542 (Guj), the facts are quite distinguishable. In that case the members have voluntarily by framing bye-law No. 38, opened the possibility of division of the surplus, in the case of dissolution, amongst non-members, namely, non-contributors also. Thus, it was a case where division of the corpus was made open amongst non-contributors as well by the voluntary act of the members themselves. Apart from the above, the question as to what is the meaning of "return of surplus" was neither raised nor decided by the court. It proceeded on the assumption that "return of surplus" relates to "return of corpus" to be shared by the members pro rata. In that view of the matter, the principle of Styles' case [1889] 2 TC 460 (HL) was not applied and in the facts of the said case the court ruled out the application of the principle of "mutuality". We find that the facts of the present case do not attract the ratio of the decision in the case of Shree Jari Merchants' Association [1977] 106 ITR 542 (Guj).
23. We have considered the view taken by the Calcutta High Court in the case of CIT v. Apsara Co-operative Housing society Ltd. [1993] 204 ITR 662, wherein the decision in the case of CIT v. Shree Jari Merchants' Association [1977] 106 ITR 542 (Guj) was also referred to. In all matters where the scope of "mutuality" has to be considered the particular case and the provisions of law as applicable should not be lost sight of. With all anxiety and with great patience we have appreciated the arguments advanced by learned counsel for the respective parties. We have tried to appreciate the facts of the present case and the provisions of law and the ration of the various decisions, as discussed above. Taking a broader view and regard being had to the facts of the present case, we are of the opinion that the claim of "mutuality" as per the arguments advanced by learned counsel for the respondent-assessee are more plausible and acceptable.
24. For the foregoing reasons we find that the view taken by the Tribunal is neither contrary to nor inconsistent with the materials on record and the provisions of law as attracted thereby. We accordingly answer question No. 1 in the affirmative, i.e., in favour of the assessee and against the Revenue. Questions Nos. 2 and 3 will follow the consequence and we accordingly answer questions Nos. 2 and 3 in the affirmative, i.e., in favour of the assessee and against the Revenue. This reference accordingly stands disposed of with no order as to costs.