9911796707
TMI Blog1993 (1) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... e to this reference are as follows : The assessee Bombay Oilseeds and Oil Exchange Ltd., Bombay, is a company incorporated under section 26 of the Indian Companies Act, 1913. It runs an exchange for transacting business in oil, oil seeds, etc. Under its bye-law No. 331(1), it is entitled to charge on each transaction of sale " lagas ", i.e., cess, at the stipulated rates. Bye-law No. 331(f) authorises the board, subject to the approval of the general meeting, to decide the manner and method of distribution and/or utilisation and/or apportionment and/or proportion of distribution of the money recovered as laga or cess under these bye-laws and other bye-laws and/or contract, terms or forms. In pursuance of this power, the general meeting of the members of the assessee held on June 6, 1959, resolved that one-third of the amount of laga received be credited to the reserve fund of the exchange, that 50% of the remaining two-thirds be credited to Shubhkam Fund, that 25% of the two-thirds be paid to Patan Pinjra Pole. Article 105 of the articles of association of the company provides that the property, capital and income of the exchange whensoever derived shall be applied solely towards t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Dealers Association v. CIT [1959] 35 ITR 121. The Appellate Assistant Commissioner did not accept the contention of the assessee. According to him, the decision of this court relied upon by the assessee was not applicable to the facts of the assessee's case. He relied on an earlier decision of this court in East India Chamber of Commerce Ltd. v. CIT [1957] 31 ITR 791, which according to him, was more apposite and, following the same, held that the principle of mutuality was absent in the case of the assessee. The Appellate Assistant Commissioner, therefore, rejected the appeals of the assessee. The assessee thereupon preferred appeals before the Tribunal. The Tribunal accepted the contention of the assessee and held that the " laga receipts did not constitute the income of the assessee and, as such, were not liable to assessment under section 28(i) of the Income-tax Act, 1961 (corresponding to section 10(1) of the Indian Income-tax Act, 1922 ). While doing so, it followed the decision of this court in the case of Surat District Cotton Dealers' Association [1959] 35 ITR 121. The Tribunal further held that the test of mutuality was satisfied in the case of the assessee. While arri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and, is that the decision of this court in the assessee's own reference for the assessment year 1949-50 is fully applicable to the case of the assessee for the years under reference. According to him, the question whether the laga receipts were liable to tax or not stands concluded by the above decision of this court. (Reference No. 33 of 1952). In the alternative, the submission of counsel is that on the facts the principle of mutuality is fully applicable to the assessee's case inasmuch as there is complete identity between the contributors to the fund and the participators thereof. It was pointed out that under the bye-laws of the assessee-company all the transactions put through by the members through the exchange (assessee) were liable to laga and in the event of dissolution, all the members without any reservation were entitled to share in the distribution of the surplus. Article 111 of the articles of association of the company was referred to in support of this argument. It was, therefore, submitted by counsel for the assessee that even if it were to be assumed for the sake of argument that there were some members who did not transact any business and, therefore, did not pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on diversion of income by overriding title. So far as the decision of this court dated March 6, 1953, in the assessee's own case for the assessment year 1949-50 (which is numbered as Reference No. 33 of 1952, and reported in Unreported Income-tax judgments of the Bombay High Court, book one at page 211) is concerned, we find that the said judgment has not laid down any law of general application. It was rendered on the facts of the case before the court. In that case, the limited question before the court was whether the sum of Rs. 1,76,097 received by the assessee by way of laga was liable to tax under section 10(6) of the Indian Income-tax Act, 1922 ( corresponding to section 28(iii) of the 1961 Act ). It was noticed by this court that in order to bring the receipt by way of laga to tax under section 10(6) it was necessary for the Department to establish that the association performs specific services for its members for remuneration and that the receipts in question related to such specific services rendered by the association to its members. As in the aforesaid case the taxing authorities had failed to find any specific service, it was held that resort cannot be had to sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The legal effect in the two circumstances is completely different. In the former, it will be an application of income. In the latter, it is diversion. The object of the resolution passed by the members in 1959 is to decide the manner of application of the laga receipts. It can be modified or rescinded by the members at any time they like. This comes into force only when the income is received by the assessee. It does not have the effect of diverting the income before it reached the assessee. The principle of diversion of income by overriding title, therefore, has no application to the facts of the present case. We may now turn to the real controversy in the case before us. The controversy is whether the amounts received by the assessee by way of laga constitute income of the assessee under section 28(i) of the Act. According to the assessee, it is not so because the principle of mutuality applies. According to the Revenue, the principle of mutuality has no application. We have considered the principle of mutuality. The cardinal requirement to apply the test of mutuality is that all the contributors to the common fund must be entitled to participate in the surplus and that all th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s fund or to be contributors to this fund. With regard to some there was a subsisting right, with regard to others the right would only arise provided a particular condition was satisfied. Let us look at it from another point of view. It is true that the facilities afforded by this Chamber with regard to maintaining a ring, making arrangements for delivery orders, etc., were open to all the members, but as far as the payment for these facilities was concerned, it was only restricted to a section of the members. The other members, although they availed themselves of the facilities, had no obligation to contribute to this fund." It was in such circumstances that it was held by this court ( at page 802 ) : " Therefore, whichever way one looks at it, it is clear that the first essential of mutuality is lacking in this case. Before we come to the question of participation in the fund, there must be contribution by all the members to the fund in the sense in which we have just indicated, viz., that there must be either an actual contribution or it should be open to every member to make a contribution if he so intended and he could carry out his intention without satisfying any conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve with the club for its development and for providing better amenities to its members." We may now examine the facts of the present case in the light of the principles set out above. In the instant case, it appears that bye-law No. 331(1) does not restrict the payment of laga to a particular category of members only. This is clear from bye-law No. 331(a). Clause (f) deals with the right of the members to decide the utilization of the receipts by way of laga by the assessee. The said bye-law being relevant for the determination of the controversy in the present case is set out below: "331(a) Every member shall pay to the Exchange LAGA or CESS (i) On every h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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