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TMI Blog1994 (10) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion 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 ? " It transpires from the material on record that the assessee is a cooperative society registered under the Bombay Co-operative Societies Act, 1925 (hereinafter referred to 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 had 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 amount 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 this head was that of mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was entitled to receive his dividend 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 shares. 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. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributors. 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. " 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 quote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture would not necessarily provide 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. 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 case, 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. The learned Advocate-General, appearing on behalf of the respondent- assessee, has advanced a very len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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. 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 apprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... member of the company and as such became entitled to a share in the assets 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 none 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. " The question comes up for consideration whether there is any statutory bar and/or impediment for the concept of "mutuality" in the cooperative 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a profit out of its own members. " 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Our attention has been drawn to section 52 of the Bombay Co-operative Societies Act and section 115 of the Gujar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 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, wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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