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TMI Blog1993 (7) TMI 10X X X X Extracts X X X X X X X X Extracts X X X X ..... ngst the mills and users of steam and water and/or electric power on all subjects connected with their common good, to ameliorate the working conditions of the employees in the mills and factories, to promote good relations between the employees and the employers, to educate public opinion and disseminate correct information about the working of the industry by means of publication of literature, by taking part in exhibitions and through the press and other media and to organise, establish, start or sponsor a separate institute or Department or Departments of the association for the purpose of doing research work, sales of paper and other products of the mills and for such other purposes as are mentioned in the objects of the association. The association does not carry on business for its members or outsiders. The receipts of the association are from the following sources: 1. Admission fee receivable from its members as per clause 17 of the articles of association. 2. Annual subscription fee receivable from its members as per clause 18 of the articles of the association. 3. Special subscription fee or surcharge receivable from its members as per clause 19 of the articles of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al meeting specially convened for the purpose. The quorum for this meeting shall be three-fourths of the total number of members on the register of members at the time. This meeting shall also decide in what manner the funds of the association, after dissolution, if any, shall be disposed of. " The Commissioner of Income-tax (Appeals) relying upon the decision of the Gujarat High Court in the case of CIT v. Shree Jari Merchants' Association [1977] 106 ITR 542, held that the assessee is not a mutual association and that income from subscriptions and admission fee is liable to tax. Being aggrieved, the assessee took the matter to the Tribunal. The Tribunal relying upon the decisions in CIT v. Madras Race Club [1976] 105 ITR 433 (Mad) CIT v. West Godavari District Rice Millers Association [1984] 150 ITR 394 (AP) and in CIT v. Cochin Oil Merchants Association [1987] 168 ITR 240 (Ker), upheld the contention of the assessee that it is a mutual association and the income from subscription and admission fees is not liable to tax. At the hearing before us, the contentions as urged before the Tribunal have been reiterated. The only question which calls for determination is whether clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ually beneficial and receive back the surplus left out in the same capacity in which they have made the contributions. Therefore, the capacity as contributors and participants remains the same. The participation envisaged in the principle of mutuality is not that the members should take the surplus to themselves. It is enough if they have a right of disposal over the surplus. The learned judges of the Andhra Pradesh High Court specifically dissented from the decision of the Gujarat High Court in Shree Jari Merchants' Association [1977] 106 ITR 542. The Andhra Pradesh High Court, thus, was of the view that the doctrine of mutuality applies even where a clause like clause 21 is incorporated in the memorandum of association. It does not militate against the application of this doctrine. The Madras High Court in Madras Race Club's case [1976] 105 ITR 433 held as follows (at page 443) : " It is well-settled that the memorandum and articles of a company represent the contract between the company and the members. It is only by virtue of their ownership of the surplus assets, if any, that the members had agreed to the clause that they would not take back the surplus, but allow it to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o some charitable object. The Punjab and Haryana High Court held that the contributors, by incorporating clause 7, did not deprive themselves of their control on the disposal of the surplus. The Punjab and Haryana High Court preferred the view taken by the High Courts of Madras, Andhra Pradesh and Kerala in the cases mentioned above and specifically dissented from the view taken by the Gujarat High Court. Clause 73 of the articles of association of the assessee which we have already set out no doubt gives discretion to the members for disposal of the assets in the event of the dissolution of the association. The Gujarat High Court in Shree Jari Merchants' Association [1977] 106 ITR 542 considered a similar clause, being clause 38 of the constitution of the said association which contemplated that at the time of dissolution of the association, its assets should be used or utilised as decided in the resolution for dissolution. The view of the Gujarat High Court was that the only obstacle which prevented the assessee from taking the character of mutuality is rule 38. According to the Gujarat High Court, if the assets of the association are not liable to be returned to the members, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the common fund or that each member should participate in the surplus and get back the surplus precisely what he has paid. We respectfully agree with the views taken by the Kerala, Madras, Andhra Pradesh and Punjab and Haryana High Courts that if the members have agreed to a clause that they would not take back the surplus but allow it to be transferred to a similar entity, it would not militate against the doctrine of mutuality, as they themselves are to deal with the surplus, if any, at the time of winding up. It cannot be said that they are not participating in the surplus. In our view, the right of the members of the club regarding the disposal of the surplus at the time of dissolution of the club cannot nullify the principle of mutuality inasmuch as the participators themselves should decide how the surplus fund should be utilised, in the years under consideration. If such a clause destroys the mutuality as held by the Gujarat High Court, it can only arise at the relevant year where such winding up has taken place. Mere inclusion of such a clause cannot by itself lead to the conclusion that there is no mutuality, although the participators in the surplus fund may decid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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