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TMI Blog2004 (9) TMI 318X X X X Extracts X X X X X X X X Extracts X X X X ..... tinguished by the Assessing Officer on facts. The Assessing Officer held that Sai Publication Fund was a religious trust, publishing books and pamphlets for spreading the religious messages sold to general public whereas in the instant case of the assessee, the goods are brought from outside and not manufactured by the assessee. The Assessing Officer held that the object of the assessee association, more specifically, making available spare parts to its members which can considered as a specific services covered by section 28(iii) of the Act. It was also the case of the assessee that the principles of mutuality will apply in the case of the assessee, hence, the income is not taxable. Reliance was placed on the decision of the Supreme Court in the case of CIT v. Bankipur Club Ltd. [1997] 226 ITR 97. This decision was also distinguished by the Assessing Officer. The Assessing Officer held that in the case of the assessee, the income is not generated from the activities between the contributors and participants alone. Apart from the members who buy the spare parts, there is a third party, i.e., being the suppliers of the spare parts. The decision rendered by the Hon'ble Apex Court cit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee that there is complete identity between the contributors and participants are also not clearly visible. As third party i.e., suppliers of spare parts are also involved in the trading activities of the association. Therefore, it is not exclusively arising from the dealing between the members. Therefore, he held that the cardinal principle of mutuality, that a man cannot make profit by trading himself does not apply in the instant case of the assessee. There is no contribution to a common fund in pursuance of some specific scheme by its members, for the mutual benefit. In the instant case of the assessee the facts are totally different from the decided cases altogether, assessee is doing business in the garb of mutuality. It is tainted with commercial activities. The assessee earns profit, a little less than the normal comparable commercial business concerns working in this field. The assessee organization is earning interest income on deposits of which they themselves paid tax. The commerciality, cannot be concealed under cover of mutuality; and mutuality cannot survive under the atmosphere of commerciality. He relied on the decision of the Hon'ble Apex Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee deals in automobile spare parts, tyres, etc., to ensure that members of mutual association get good quality material at low cost. The assessee, thus, makes surplus which the assessee claims as exempt on the principles of mutuality. The claim of mutuality was rejected by the Assessing Officer as well as the CIT (Appeals). According to the assessee, no non-members are eligible to procure any items of spare parts from the shop run by the association. There is no particular service to any particular member. It is a general service made available to all the members of the Association. No commercial dealings in fact. By doing trade among themselves, one cannot earn any profit. The association is acting as an agent for its members in the matter of procuring spare parts, etc., and supplying the same to its members, no sale would be involved as the element of 'transfer' would be completely absent. The assessee relies on the decision of the Apex Court in the case of Bankipur Club Ltd. The principle is that the members have a right to participate in the whole, there is no trading among the members. There cannot be trade with themselves. The assessee also relies on the decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 2(5A) of the Bombay Sales-tax Act, 1959, the Hon'ble Apex Court held that "if the main activity is not business, then any transaction incidental or ancillary would not normally amount to 'business', unless an independent intention to carry on 'business' incidental and ancillary is established". Their Lordships further held "in such cases, the onus of proof of an independent intention to carry on 'business' in the incidental or ancillary activity of sales rests on the department". 12. In the principles of mutuality, the dominant intention is not business. Is it possible to say the same about the assessee association? It is true that they are collecting membership fee and getting high quality materials i.e., spare parts, tyres, etc. for its members and supply it to members at a cheaper price. The profit or surplus may be intended to be used for educating the members. The case law relied upon by the assessee in the case of Bankipur Club Ltd went in favour of the assessee for the reason stated in pages 109 and 110 of the order of the Apex Court. The relevant portion is reproduced below:- "Now, we turn to the main question canvassed by the Revenue in the appeals coming under Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 it's members 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." 15. In the case of club, it is providing certain facilities to its members. The assessee provides guidance to its members and provide facilities, ultimately used by the members in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioned above, has been explained with reference to Indian decisions in 'The Law and Practice of Income-tax' by Kanga and Palkhivala at page 113, thus: '... 'The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid'. The Madras, Andhra Pradesh and the Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves: it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects....' The crucial issue that arises for consideration in cases where it is claimed that on the basis of principle of mutuality, the receipts by the 'society' or 'club' are exempt from taxation, has been succinctly stated by the Judicial Committee of the Privy Council in Fletcher v. Income-tax Commissioner [1971] 3 All ER 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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