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TMI Blog1973 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... essee filed returns accompanied by statements showing how its business income was worked out. While returning its income, the assessee deducted the annual subscription received from members and added a foot-note to the effect that the annual subscription received from members was exempt from tax. In section (F) of the return of the income, the assessee showed the figure of annual subscription from members but there too a note was added to the effect that the annual subscription received from members was exempted. The respondent is also found to have received entrance fees from its members but these fees were not shown in the return and, were, therefore, not processed by the concerned Income-tax Officer during the course of the assessment. In the statement of accounts submitted by the assessee it was found that it had debited expenses for entertaining its members. During the course of the assessment, these expenses were disallowed by the Income-tax Officer and being aggrieved thereby, the assessee approached the Appellate Assistant Commissioner in appeal. So far as the dinner expenses were concerned, the Appellate Assistant Commissioner agreed with the view taken by the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern " and the annual subscription as well as the entrance fees received by it from its members did not fall within the ambit of the definition of the word " income " and since the surplus of the assets of the assessee after deducting expenditure were to be returned to the members, the said surplus was not liable to tax. Being aggrieved by this decision of the Appellate Tribunal, the revenue has preferred this reference wherein 3 questions have been referred to us for our opinion : " (1) Whether, on the facts and in the circumstances of the case, it was open to the Appellate Assistant Commissioner to exercise his power of enhancement in respect of the annual subscriptions received by the assessee from its members ? (2) Whether, on the facts and in the circumstances of the case, it was competent for the Appellate Assistant Commissioner to exercise his powers of enhancement with reference to entrance fees received from its members ? (3) Whether on the facts and in the circumstances of the case-- (i) the annual subscription received by the assessee ; and (ii) the entrance fee received from new members ; are liable to be included in the total income of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion' means any combination, whether temporary or permanent, formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen, or between employers and employers, or for imposing restrictive conditions on the conduct of any trade or business, and includes any federation of two or more trade unions. " There is a proviso to this section with which we are not concerned in this reference. Section 6 of the Act says that a trade union shall not be entitled to registration under the Act, unless the executive thereof is constituted in accordance with the provisions of the Act and the rules thereof provide for the matters which are enumerated in this section. The section contains clauses (a) to (j). So far as this reference is concerned, it is only clause (j) which is relevant. This clause (j) says that the rules of a trade union should provide for " the manner in which the trade union may be dissolved ". Then we go to section 13 which says that every registered trade union shall be a body corporate by the name under which it is registered and shall have perpetual succession and a common seal with power to acquire and hold both mov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cerned. The correct translation of that clause would be as under : " If it is resolved to dissolve the Mandal, the assets at the time of such dissolution shall be 'used' as decided in the resolution of such dissolution ". Thus, rule 38 of the constitution of the association contemplates that at the time of the dissolution of the association, its assets should be used or utilised as decided in the resolution for dissolution. The point to be noted is that this clause does not contemplate the distribution of the assets of the association amongst its members. This particular point is noted by us at this stage because it has a great bearing in considering whether the association is a mutual concern or not. Now reference to sub-section (2) of section 27 of the Act shows that where the dissolution of a registered trade union has been registered and the rules of the trade union do not provide for the distribution of funds of the trade union on dissolution, the Registrar shall divide the funds amongst the members in such manner as may be prescribed. This manner is prescribed by regulation No. 16 of the Gujarat Trade Unions Regulations, 1963, which are framed under the powers confer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rance fee shall be Rs. 101. A member may be admitted at any time during the year, but the annual membership fees paid shall be for the year being ended on 31st March ; that means annual membership fees shall be collected for the period from 1st April to 31st March only. When a member ceases to be a member he shall have no right of any kind on the entrance fee and the assets acquired by the Mandal during his membership. 34. Any amount received by the Mandal from any source shall be credited to the Mandal's capital fund and be deposited in the name of the Mandal in any bank or banks selected by the managing committee and that shall be considered as assets of the Mandal. 35. Capital of the Mandal shall be used for the following purposes, if found necessary, and not for any other purposes : (i) For the payment of salaries and amenities of the employees of the Mandal and for other expenses of the Mandal. (ii) For auditing the books of the Mandal. (iii) Expenses for defending or complaints made to safeguard the interest of the Mandal or the interest of the members in the Mandal ; (iv) Expenses for trade disputes with the Mandal or related to any member of the Mandal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady their own. The receipt which thus comes in their hands is not a profit, because, as pointed out in many cases on the subject, no man can make a profit out of himself, just as he cannot enter into a trade or business with himself. Therefore, the main test of mutuality is complete identity of the contributors with the recipients. This identity need not necessarily be of individuals, because it is the identity of status or capacity which matters more. Thus, individual members of an association may be different at different times ; but so long as the contributors and recipients are both holding the membership status in the association, their identity would be clearly established, and the principle of mutuality would be available to them. Nothing would detract from this principle even if their association is a body corporate, and, hence, a legal person. If such a mutual concern receives any income, the surplus of which goes back to those who contributed the said income, it is not liable to tax because on account of the operation of the principle of mutuality, the income remains, in reality, the income of the contributors. The leading, and often quoted, case on the subject of mutua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te against the very basic principle of mutuality. This is, therefore, not a case which would be governed by the principles of Styles' case [1889] 2 TC 460 (HL). Shri Patel, the learned advocate of the assessee, realising this position, contended that, on its true construction, rule 38 does not contemplate the distribution of the assets among non-members, because, according to him, this rule contemplates the " use " of the surplus assets, and, according to rule 35, the " use " of the funds of the association can be made only for the six items mentioned therein. He pointed out that all the six items of rule 35 are relating to the various activities of the association in which only the members are interested. We find that this argument had no force whatever because a bare perusal of rule 35 shows that it refers to the application of the " funds " of the association for its day-to-day working such as payment of salary to its employees, office expenditure, audit expenditure, expenditure incurred for protecting the interest of a member of the association, for trade disputes, for issuing circulars and other literature and for carrying out the objects of the association. When the associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, it is not possible to hold that that part of rule 38 which enables the assessee to distribute its assets among nonmembers is, in any manner, illegal and void. Shri Patel then contended that, at the time of the dissolution of the assessee-association, its assets and funds would revert to its members by way of a resulting trust. Even this contention is not acceptable in view of the specific provisions contained in rule 38 of the constitution of the association because, this rule, being a rule of the constitution, is the very foundation of the formation of the association. Under the circumstances, there is no scope for holding that the assets and funds of the association would revert back to its members as and by way of a resulting trust. In the result, we conclude that the assessee is not a mutual concern and cannot claim exemption from tax on that ground. In our opinion, the Tribunal was not right in holding that the assessee-association is a mutual association. The Tribunal has held that even apart from the principle of mutuality, these subscriptions realised by the assessee from its members do not partake of the character of income in its hands, and, therefore, al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from business or profession. The assessee is obviously a non-trading association and does no business with any of its members. The subscriptions received by it from its members can, therefore, not be charged to tax under the head " D--Profits and gains of business or profession " of section 14 of the Income-tax Act, 1961, or clause (iv) of section 6 of the Act of 1922. But that does not settle the question of taxability of subscriptions received by the assessee from its members because, if these subscriptions amount to " income ", tax on that " income " would be chargeable under the residuary head " F ", which relates to income from other sources. Therefore, the pertinent question which arises to be considered is whether the receipt of subscription by the assessee from its members amounts to the receipt of " income ". While considering the question it should be borne in mind that the assessee as a trade union registered under the Act is a body corporate and a legal person. Even if it was not so registered, for the purpose of the Income-tax Acts, it would be a " person ". The word " income " is given an inclusive definition both in the Act of 1922 and in the Act of 1961. This def ..... X X X X Extracts X X X X X X X X Extracts X X X X
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