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TMI Blog2024 (7) TMI 1422X X X X Extracts X X X X X X X X Extracts X X X X ..... t Income, is the implicit requirement that the learned Assessing Officer shall touch upon the mutuality issue to ensure accurate assessment of deductions. Since it is not possible to evaluate the deductions claimed, without examining the mutuality, and violation of mutuality principle is apparent on the face of provisions of Sections 15A and Section 15(1) of The State Act, learned Assessing Officer is justified in examining such an incidental issue also. Since the issue relating to the principal of mutuality is sine qua non for determining the issue of deductions claimed by the assessee, and such an issue does not require any in-depth examination, question of obtaining the permission of higher authorities does not arise. . On this score, we reject the contention of the assessee. Principle of mutuality - The argument advanced by the learned AR that a statute's provisions override this requirement and allow benefits only to members is not convincing. Hon ble Supreme Court s rulings in Chelmsford Club [ 2000 (3) TMI 4 - SUPREME COURT ] made it clear that any breach of the identity between contributors and beneficiaries transforms the transactions into commercial ones, subjecting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to prevail in that State if it has received the President s assent, although Parliament can subsequently override such State law. When a Central Act explicitly states its non-application in areas where there is State legislation on the same subject, the invocation of the doctrine of repugnance is unnecessary. The Central Act's provision for its own non-application in the presence of State law avoids any conflict, thus negating the need for Article 254 to be applied. We, therefore, hold that the doctrine of repugnance does not apply when a Central Act contains a clause that excludes its application where State legislation exists on the same subject. This clause demonstrates a clear legislative intent to defer to State law, effectively resolving potential conflicts and making the invocation of the doctrine of repugnance superfluous. The scheme and framework of The State Act reinforces that expenditures are application of received funds, conducted in a structured and regulated manner, but does not grant an overriding title to any authority to spend the funds without leaving any discretion to the Committee. On the other hand, it mandates the collection, management, and application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT vs. Bankipur Club Ltd.; (226 ITR 97 (SC)). Learned Assessing Officer also recorded that the assessee claimed the Status of Local Authority. The case was selected for scrutiny through CASS to examine the deduction against income from other sources . Learned Assessing Officer noticed that the assessee received a sum of Rs. 6,63,48,049/- Life membership fee, Nomination fee, Certificate Fee, Interest on savings bank, Interest on fixed deposit, proceeds from sale of welfare fund stamps, and Miscellaneous receipts and against such receipts claimed deduction at Rs. 6,17,81,213/- as expenditure under the head(s) of death benefits, retirement benefits, funeral expenses financial assistance to advocates and towards Personal General expenses. 3. Learned Assessing Officer called upon the assessee to explain how the status of the assessee is Local Authority and how the expenditure claimed as deduction is allowable under Act. It was further asked to explain the nexus between the income and the expenditure reported in its return of income. By way of written submissions before the learned Assessing Officer, the assessee contended that the Hon ble Supreme Court, in CIT vs. Bankipur Club Ltd., es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese transactions, exempting the surplus from income tax as it constitutes advocates' contributions. 7. It was the further contention of the assessee before the learned Assessing Officer that the welfare fund, formed under the Welfare Fund Act, 1987 ( the State Act ), is an Artificial Judicial Person for income tax purposes. The State Act defines advocates as those admitted to its benefits, with funds credited from various sources, including advocate contributions and government grants. Benefits include payments on cessation or suspension of practice, with eligibility criteria outlined in The State Act. The fund's sources and benefits confirm its mutual nature, satisfying the conditions for tax exemption. Thus, Welfare Fund operates on mutuality principles, ensuring all contributions and benefits are confined within its advocate base. 8. On a consideration of all the contentions raised by the assessee, Learned Assessing Officer found that the principle of mutuality is not applicable to the interest earned from Savings Accounts and Fixed Deposits, as the contributors (Banks) are not the same as the participants (advocates). Citing Hon ble Supreme Court s decision in Bangalore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Welfare Fund is for the benefit of its advocates, mandating that advocates affix a Welfare Fund Stamp on the Vakalatnama, a requirement enforced by judicial officers. Learned Assessing Officer's claim that the sale of Welfare Fund Stamps is commercial was deemed a misunderstanding of the legislative purpose, which is to ensure proportional contributions from advocates. 12. It was argued by the assessee before the learned CIT(A) that the learned Assessing Officer failed to grasp the contribution method specified by law, and incorrectly taxed the entire receipts without accounting for the incurred expenses. The contention was that clients appoint Advocates only when representation is required, making the affixing of Welfare Fund Stamps a simple legal requirement, not a commercial activity. Assessee emphasized that the legislation aims to benefit advocates, and contributions, including interest earned and Stamp receipts, are clearly intended for this purpose. Learned Assessing Officer's assertion of no nexus between advocates payments and receipts was refuted, highlighting that contributions are exclusively from advocates and benefit them solely. 13. Assessee further c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hlighted that the stamp sales were compulsory and paid for by clients, indicating a commercial intent. Consequently, this ground of appeal was also decided against the Assessee, reinforcing the lack of mutuality and voluntary nature in the transactions. 17. Learned CIT(A) considered the Assessee s claim that all receipts and expenditures as per the Welfare Fund Act should benefit the advocates and thus qualify for mutuality-based exemption. This argument was dismissed, as mutuality was not established, and the transactions bore commercial and business intentions, disqualifying them from exemption under the principles of mutuality. 18. Learned CIT(A) upheld the Learned Assessing Officer's view on the exemption under section 23 of the Welfare Fund Act. The Learned Assessing Officer pointed out that the State Act is listed in Schedule II of the 2001 Act, making it ineligible for the exemption. Therefore, the claim that all receipts are capital in nature and not taxable was dismissed. 19. Learned CIT(A) addressed the final allegation regarding the deductibility of payments from different income sources. The Learned Assessing Officer had analysed the expenses, such as death benefits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tamps. The collected funds are deposited in banks, with interest used for advocates' welfare. These transactions adhere to the mutuality principle, exempting the surplus from income tax as it constitutes advocates' contributions. 24. Learned AR further contended that Advocates Welfare Fund, formed under the Advocates Welfare Fund Act, 1987, is an Artificial Judicial Person for income tax purposes. The State Act defines advocates as those admied to its benefits, with funds credited from various sources, including advocates' contributions and government grants. Benefits include payments on cessation or suspension of practice, with eligibility criteria outlined in The State Act. The fund's sources and benefits confirm its mutual nature, satisfying the conditions for tax exemption. 25. Learned AR argued that the State Advocates Welfare Fund , constituted under section 3 of the State Advocates Welfare Fund Act, 1987, is considered an Artificial Judicial Person despite its status as a Local Authority per PAN. Authorities confirmed this status, but they misunderstood the legislative intent. The formation of Advocates Welfare Fund is for the benefit of its advocat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed DR argued that the principle of mutuality does not apply to the interest earned from Savings Accounts and Fixed Deposits because the banks contributing the interest are not the same as the advocates benefiting from it. Citing Hon ble Supreme Court's decision in Bangalore Club vs. CIT, he submitted that such interest is commercial in nature and not exempt under mutuality. However, the Assessee's receipt of Life Membership Fees, Nomination Fees, and Certificate Fees from advocates was accepted under the principle of mutuality. 30. Learned DR further submitted that most of the contributions to the Fund come from Stamp sales, where advocates must affix Welfare Fund Stamps along with court fee Stamps on Vakalats. This requirement creates a lack of identity between contributors and beneficiaries, as not all contributors benefit from the fund. Moreover, the actual contributors are the advocates' clients, who reimburse the cost of the Stamps through legal fees, making the contributions commercial transactions rather than voluntary ones. Consequently, the income from Welfare Fund Stamps does not qualify for mutuality exemption due to its commercial nature and lack of voluntar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R also argued that expenses such as death benefits, financial assistance, funeral expenses, suspension of practice, and retirement benefits are applications of income, not incurred exclusively for earning income, and thus not allowable under section 37 of the IT Act. Contending so, he prayed for the dismissal of the Assessee s appeal on these grounds. 36. We have gone through the record in the light of the submission made on either side. It could be seen from the above arguments on either side, assessee is challenging the impugned orders on several grounds like the jurisdiction of the learned Assessing Officer to examine the issue relating to the mutuality when the case is selected for the limited scrutiny to verify the deductions against the income; eligibility of the assessee to claim exemption basing on its status as local authority or instrumentality of state; applicability of the provisions of the Central act when both the Central and State Acts operate in the same space, by invoking the doctrine of the pregnancy; substantial compliance with the principles of mutuality on the ground that large number of participants are also contributors; statutory mandate, high the primacy of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mperative and it is implicit in the direction to verify the deductions against the income. 38. This nuanced situation created a scenario where the issues of deductions and the principle of mutuality overlap, making it essential to address both to arrive at an accurate assessment. This incidental examination is necessary to ensure that the deductions claimed are appropriate for the type of income being assessed. No doubt, initially, the AO should focus on examining the deductions claimed against income from other sources. But this involves verifying the compliance with the relevant provisions of the Act. When, during this process, it becomes imperative that understanding the nature of the income is essential to determine the validity of the deductions, the learned Assessing Officer has no other go except to examine the mutuality principle. 39. We, therefore, reach a conclusion that the interconnected nature of deductions and the principle of mutuality means that the learned Assessing Officer shall examine the issue of mutuality since directly impacts the evaluation of the deductions claimed. In this case, the requirement to verify the deduction against Income, is the implicit requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mandates that the government, through a notification, constitutes the fund. Contributions to this fund are pooled from various sources specified in The State Act. Primarily, Section 12 stipulates that every Vakalatnama or memorandum of appearance filed before any court must be affixed with a Welfare Fund Stamp valued at one hundred rupees. This requirement ensures assured contributions from practicing advocates. In terms of Section 3(2)(b) of the State Act, the Bar Council of Andhra Pradesh may make contributions to the fund. Voluntary donations from the Bar Council of India, any Bar Association, individual advocates, or any other persons are also credited to the fund under Section 3(2)(c) of the State Act. Government grants from both the Central and State Governments contribute to the fund as specified in Section 3(2)(d). The fund also accrues income from investments, with Section 3(2)(g) of the State Act directing that interest or dividends earned from such investments be credited back to the fund. Apart from this, application fees and annual subscriptions collected under Section 15 of the State Act, along with any interest accrued on these amounts, form another significant sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , this statutory compulsion challenges the core principle. Mutuality is based on the idea that contributors to a fund are the same individuals who benefit from it. The inclusion of non-beneficiary contributors disrupts this balance, as it creates a scenario where some contributors do not receive any benefits in return for their contributions. This undermines the mutuality principle, as the fund includes contributions from individuals who are not part of the mutual benefit group. The statutory scheme, as outlined in the Andhra Pradesh Advocates' Welfare Fund Act, 1987, therefore, presents a conflict with the mutuality principle by enforcing contributions from nonbeneficiary advocates. 46. In these appeals we are, therefore, called upon to examine this significant question as to whether such a statutory requirement adheres to the principle of mutuality, as the mandatory contributions from nonbeneficiary advocates could be seen as incompatible with the fundamental idea of mutual benefit. The statutory framework must be assessed to ensure it upholds the mutuality principle and provides a fair and just mechanism for all contributing advocates. 47. The principle of mutuality is predi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and beneficiaries is breached. Hon ble Supreme Court has emphasized that the mutuality principle requires complete reciprocity and identity between contributors and participants. When this identity is absent, as in cases where non-members are compelled to contribute but are excluded from benefits, the transactions assume a commercial nature, making the surplus taxable. 52. The argument advanced by the learned AR that a statute's provisions override this requirement and allow benefits only to members is not convincing. Hon ble Supreme Court s rulings in Chelmsford Club vs. CIT, Bankipur Club, and Bangalore Club made it clear that any breach of the identity between contributors and beneficiaries transforms the transactions into commercial ones, subjecting the surplus to taxation. Thus, the statutory mandate allowing benefits only to members while compelling contributions from non-members would not suffice to invoke the principle of mutuality and exempt the surplus from tax. 53. The Hon ble Supreme Court of India in Yum! Restaurants (Marketing) Private Limited vs. CIT (2020) 424 ITR 630 provided a detailed analysis of the doctrine of mutuality, particularly emphasizing the necessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontributors. This ensures a homogeneous class with no external commercial elements interfering. The Court further referenced its earlier ruling in Bankipur Club, where it was held that if an entity engages in transactions with both members and non-members, the transactions lose their mutual character and become commercial. Similarly, in Royal Western India Turf Club (supra), the Court held that money realized from both members and non-members for the same activities disqualifies the entity from claiming mutuality. 57. Hon ble Court also cited the British Tax Encyclopaedia (1962 Edition), which states that for the doctrine of mutuality to apply, all contributors to the common fund must be entitled to participate in the surplus, and all participants in the surplus must be contributors. This ensures that there is no interference of any alien commercial entity in the transactions. 58. Ultimately, Hon ble Supreme Court concluded that the assessee company did not fulfil the conditions of mutuality, particularly the requirement of complete identity between contributors and participants. Therefore, it could not claim exemption from tax liability. The doctrine of mutuality, which provides s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly and are admitted to the Fund, are entitled to various benefits, while non-members are excluded. This differentiation disrupts the principle of mutuality, as not all contributors to the welfare mechanism receive reciprocal benefits. 61. No doubt, the Welfare Fund's structure does not align with typical commercial entities, as it is intended for the welfare of advocates rather than profit generation, but, at the same time, the differential treatment of advocates and the Fund's independent financial operations suggest a quasi-commercial character. Under Section 10, the Fund engages in activities like borrowing and investment, which are characteristic of commercial enterprises. Although these activities are for welfare purposes, the financial autonomy and the ability to generate income from various sources, namely, donations, investments etc., impart a commercial aspect to the Fund's operations. 62. Despite the statutory mandate and however high the primacy of statutory objectives and legislative intent in determining the character and legality of an entity s operations, given the patent breach of mutuality, in the light of various decisions of Hon'ble apex court ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-application in areas where there is State legislation on the same subject, the invocation of the doctrine of repugnance is unnecessary. The Central Act's provision for its own non-application in the presence of State law avoids any conflict, thus negating the need for Article 254 to be applied. 68. We, therefore, hold that the doctrine of repugnance does not apply when a Central Act contains a clause that excludes its application where State legislation exists on the same subject. This clause demonstrates a clear legislative intent to defer to State law, effectively resolving potential conflicts and making the invocation of the doctrine of repugnance superfluous. 69. Now coming to the argument that the Andhra Pradesh Advocates' Welfare Fund Act, 1987, provides an overriding title for spending funds for the objectives of the Fund, it requires a little deep analysis of the provisions of the State Act. A reading of the State Act shows that it constitutes the Andhra Pradesh Advocates' Welfare Fund to support the welfare of advocates in Andhra Pradesh. According to Section 3 of The State Act, the Fund is comprised of various receipts, including amounts paid under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fund Committee, ensuring that all actions are within the framework of The State Act. We, therefore, hold that The State Act does not provide an overriding title for spending funds for the objectives of the Fund, but rather outlines the application of receipts after they are received. 72. Learned AR stressed much on the statutory objectives and legislative intent of the Andhra Pradesh Act, stating that when the assessee is discharging the statutory obligations under the State Act, it is not reasonable to fasten tax liability on the surplus funds, which are meant for application towards the statutory objects. In the framework of Income Tax Act, exemption provisions specifically Section 23, are conditional upon adherence to the mutuality principle and fulfilment of requirements set forth in Sections 11 and 12A. Conversely, Section 23 of the Andhra Pradesh Advocates Welfare Fund Act, 1987, also claims exemption from income tax, which poses a conflict due to the violation of the mutuality principle. Because of glaring breach of mutuality principle, despite the statutory objectives and legislative intent of the Andhra Pradesh Act, it cannot override or encroach upon the domain of centra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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