2012 (6) TMI 468 - HC - Income Tax

Principal of mutuality - Association - Scope of section 28(iii) - purchase and distribution of tyres, automobile spares, etc., to its own members. - the only test to consider whether the principle of mutuality applies is whether the contributors to the club or the organisation are the participants in the benefit derived from it. - Admittedly, the beneficiaries of the little profit derived by the respondent-association as in the case of the clubs are the members. In other words, the purchases made by the members lead to profit to the association which in turn goes to the members or for their own benefit. - the principle of mutuality squarely applies to the case of the respondent-association for the transactions carried on by them. Scope of section 28(iii) - held that - the above provision does not apply to the facts of this case. The only other exception for assessment of mutual benefit concerns is only the income falling under section 2(24)(vii) which provides for assessment of profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society, computed in accordance with section 44 or any surplus taken to be such profits and gains by virtue of the provisions contained in the First Schedule to the Act. - This provision has no application so far as the respondent association is concerned. - Tribunal rightly upheld the respondent s entitlement for exemption from payment of income-tax by applying the prin- ciple of mutuality. - Decided in favor of assessee.

Summary

Issues:
- Challenge to income-tax exemption for a mutual benefit association
- Interpretation of principle of mutuality
- Applicability of section 28(iii) of the Income-tax Act

Challenge to Income-tax Exemption:
The case involved appeals by the Revenue challenging the Tribunal's orders granting income-tax exemption to a respondent as a mutual benefit association. The respondent, an association of private bus operators, engaged in the purchase and sale of tyres and automobile spares to its members. The Assessing Officer denied the exemption, considering the surplus as business income under section 28(iii) of the Income-tax Act. Despite the first appellate authority confirming the levy, the Tribunal accepted the respondent's claim based on the principle of mutuality, leading to the appeals.

Interpretation of Principle of Mutuality:
The Tribunal based its decision on Supreme Court precedents, emphasizing cases like CIT v. Bankipur Club Ltd., Chelmsford Club v. CIT, and CST v. Sai Publication Fund. These cases highlighted that clubs engaged in activities similar to the respondent, serving their members exclusively. The Tribunal reasoned that since the respondent's members were the beneficiaries of the profit derived from transactions, the principle of mutuality applied. The Court concurred, stating that the key test for applying mutuality was whether contributors were participants in the benefits. As the profit from members' purchases directly benefited them, the principle of mutuality squarely applied to the respondent's transactions.

Applicability of Section 28(iii) of the Income-tax Act:
The Revenue relied on the meaning of "specific services" from the Supreme Court's decision in CIT v. Calcutta Stock Exchange Association Ltd. The Court clarified that specific services referred to conferring particular benefits not available unless specific fees were paid. However, in this case, the regular services provided by the association, such as selling tyres and spare parts to members, did not qualify as specific services under section 28(iii). The Court noted that the association did not render any specific services or charge for them beyond the distribution of goods. As a result, the provision did not apply, and the Tribunal correctly upheld the respondent's entitlement to exemption based on the principle of mutuality.

In conclusion, the High Court upheld the Tribunal's decision, dismissing the Revenue's appeals and affirming the income-tax exemption for the respondent association as a mutual benefit association. The Court emphasized the consistent application of the principle of mutuality and the lack of specific services rendered beyond the distribution of goods to members, leading to the exemption from income tax.