1985 (4) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Appellate Tribunal was justified in not allowing exemption in respect of profit arising out of dealing between the society and its members on the ground of mutuality.
2. Whether the Appellate Tribunal was justified in holding that subsidy and grants received from different companies are revenue receipts and taxable under the Income-tax Act.

Issue-wise Detailed Analysis:

1. Exemption on the Ground of Mutuality:
The primary issue was whether the profits arising from dealings between the society and its members should be exempt based on the principle of mutuality. The taxing officer, Appellate Assistant Commissioner, and the Appellate Tribunal all held that the profits were business receipts and thus taxable. The Tribunal found that the society traded with both members and non-members, and the surplus was distributable among members, indicating no mutuality. There was no complete identity between contributors and participators, as members who had not contributed to the surplus were still entitled to participate in it. The Supreme Court cases of CIT v. Royal Western India Turf Club Limited [1953] 24 ITR 551 and CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241 were cited, establishing that mutuality requires a complete identity between contributors to and participators in a common fund. In this case, the society's dealings with non-members and the distribution of surplus to members who did not contribute to it meant there was no mutuality. Therefore, the profits from sales to members were taxable.

2. Taxability of Subsidy and Grants:
The second issue concerned whether subsidies and grants received by the society from various companies were revenue receipts and thus taxable. The Tribunal held that these payments, received regularly and connected to the society's business activities, were revenue receipts. The Tribunal noted that these payments were made as part of the companies' labor welfare activities and were not casual or capital receipts. The assessee's reliance on Circular No. 142 dated August 1, 1974, from the Central Board of Direct Taxes was found to be misplaced, as the circular pertained to subsidies for industrial growth, not for supplementing profits. The nature of the subsidies and grants received by the society was different, being regular payments for worker welfare, and thus were revenue receipts. The Bombay High Court's decision in Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 supported this view, as it held that regular subsidies meant to enable business operations were revenue receipts.

Conclusion:
The High Court affirmed the Appellate Tribunal's decisions on both issues. The profits from sales to members and the subsidies received were taxable as income. The court answered both questions in the affirmative, in favor of the Department and against the assessee, with no order as to costs.