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TMI Blog2024 (11) TMI 774X X X X Extracts X X X X X X X X Extracts X X X X ..... ) TMI 925 - SUPREME COURT] by remanding the matter to the Assessing Officer to verify the claim of the assessee company as to whether any outsider is provided service or not so as to tax accordingly. In the facts of the case, the assessee company has received the contribution from its members for the services to be provided for the treatment of the effluent. The company is formed pursuant to the directions/suggestions made by this Court so as to reduce the pollution which is in the public interest and therefore, the form in which the company is incorporated is irrelevant. The objects of the company also makes it clear that the surplus, if any, would not be paid to its members and in case of dissolution of the respondent company, only Rs. 100/- would be paid to its members. Thus, the submissions made by the learned advocate for the appellant revenue relying upon the findings arrived at by the CIT (Appeals) are contrary to the settled legal position and the Tribunal has rightly therefore held in favour of the assessee by applying the principle of mutuality by holding that the income/surplus of the respondent assessee company would not be liable to tax on principle of mutuality. We ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity having been decided by it in favour of the assessee-respondent? (4) Whether in the facts and circumstances of the case the Tribunal erred in not deciding the question of surplus of the sum of Rs. 5,42,19,854/- on the ground of principle of mutuality having been decided by it in favour of the assessee respondent? (5) (i) Whether the Ld. Tribunal has committed an error in allowing the Principle of Mutuality followed by te assessee? (ii) Whether the Ld. Tribunal had erred in holding that the income of Rs. 7,02,40,298/- is not the business income? (6) A. Whether on the facts and circumstances of the case and in law, the Appellate Tribunal has committed an error in applying the principle of mutuality? B. Whether on the facts and circumstances of the case and in law, the Appellate Tribunal has erred in holding that the income of Rs. 53,35,87,298/-? 4. The other issue which is raised in Tax Appeal No. 690 of 2012 and 691 of 2012 and 1379 of 2018 is with regard to disallowance of depreciation. 5. The respondent assessee is a Public Limited Company incorporated under the provisions of the Companies Act, 1956 pursuant to the order passed by this Court for taking effective steps containin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Gujarat High Court for treating waste water discharged by them. 4.2 The principal object and activity of the Company is to install, operate and maintain plant for treatment of waste water effluent generated by the industries located in Industrial Estate of Gujarat Industrial Development Corporation ( GIDC ) at Vapi, and the adjoining Industrial Area of Gujarat. 4.3 Cl. 5 of the Main Objects of the Company reads as; To render effluent treatment services to the industrial establishments in the Vapi GDIC Industrial Estate and the surrounding areas on such terms and conditions as may be mutually agreed between the parties and for the purpose to enter into a collective agreement with the Association of Industries or with the individual industry as may be deemed fit . 5.1 Following are the salient features of the Memorandum and Articles of Association (MoA)/Article of Association (AOA) of the Company. a) Memorandum of Association Clause V provides that, in the event of winding up of the Company, every member would be liable for an amount not exceeding Rs 100. Clause VI provides that the property or surplus remaining upon satisfaction of all debts and liabilities shall be paid to or d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruction of an effluent treatment plant several years ago. However, the progress of the project was tardy. In view of the above mentioned Order of the Hon'ble Gujarat High Court, VIA promoted the Company which, in turn, acquired the plant from GIDC. b) The Company has acquired the effluent treatment plant ( the plant ) from GIDC for an approximate consideration of Rs. 19 crores. As per the agreement between the Company and GIDC, the consideration was payable in 32 equated quarterly installments (EQI) along with specified interest on the outstanding amount. 6.3 a) The Company based on chemistry of waste water, collects one-time non-refundable entrance fee of Rs. 15,000/- or Rs. 2,000/- for admitting the Industrial Units as its Members. b) The Members are required to pay to the Company their contribution for treatment of waste water on monthly basis. As it is not practical to ascertain the actual quantity of waste water, the members pay their contribution on the basis of water consumed by them. The data in respect of the quantity of water consumed by the Members is obtained from GIDC. The Members pay their contribution depending on chemistry of their waste water. c) The Members wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der passed by this Court and therefore, the basic ingredients of principle of mutuality is not followed. 11. It was further submitted that the composition of the Board of Directors of the respondent company includes outsiders being nominees from the Government and therefore admittedly the affairs of the respondent Company are not conducted by the members for the members but the decisions are being influenced by the outsiders which is contrary to the principle of mutuality. 12. Learned advocate Mr. Sanghani referring to the findings of the CIT (Appeals) submitted that the members who have paid for the services provided by the assessee company for treatment of the Effluent water cannot be said to have made any contribution so as to invoke the principle of mutuality. It was submitted that on perusal of the aim and the objects of the assessee company, it is clear that it is for profit making as it also provides for entering into partnership with outsiders for sharing the profits. 13. Learned advocate Mr. Sanghani invited the attention of the Court to the findings given by the CIT (Appeals) in detail wherein the CIT (Appeals) has narrated the facts about granting discount to the members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts narrated by the CIT (Appeals) in detail as stated hereinabove, it was submitted that on perusal of the facts it is clear that assessee company was established to provide the service to its members by running the effluent treatment plant of the GIDC which was acquired for Rs.19 Crores at the relevant time with the funds raised by the assessee company from its members. It was submitted that all the ingredients of the principle of mutuality are fulfilled in the case of the petitioner which is considered by the Tribunal and for the purpose of the services rendered by the petitioner to the non members, the petitioner is liable to pay tax on the income generated on account of the services provided to the non members. It was also pointed out that the interest earned by the petitioner on the surplus funds invested is also offered to tax. In support of his submissions, reliance is placed on the decision in case of Secunderabad Club v. Commissioner of Income Tax reported in (2023) 457 ITR 263 (SC). 17. Referring to the decision of the Hon'ble Supreme Court in case of Commissioner of Income Tax, Bihar v. Bankipur Club Limited reported in (1997) 5 SCC 394, it was submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 44 and 45). 18. Reliance was placed on the decision in the case of Chelmsford Club v. Commissioner of Income Tax, Delhi reported in (2000) 3 SCC 214, wherein the Hon ble Supreme Court has held as under:- 14. From the above extract of the judgment, it is crystal clear that the law recognises the principle of mutuality excluding the levy of income tax from the income of such business to which the above principle is applicable. In the above case, this Court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English Scottish Jt. Coop. Whilesale Socity Ltd. v. CIT (Ag) (AC at p.419) the existence of which establishes the doctrine of mutuality. They are as follows: (1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated, as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. 15. If we apply the above three criteria to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tribution originates from its members. The contribution is expended only for meeting the objects of the association, for the benefit of the members. According to the assessee, there is an absolute identity between the contributors and the participators and, as a result, the principle of mutuality would stand attracted. Mutuality 7. The principle of mutuality postulates that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus are contributors to the common fund. It is in this sense that the law postulates that there must be a complete identity between the contributors and the participators. The essence of the doctrine of mutuality lies in the principle that what is returned is what is contributed by a member. A person cannot trade with himself. It is on this hypothesis that the income which falls within the purview of the doctrine of mutuality is exempt from taxation. XXX 9. A Division Bench of the Gujarat High Court in Sports Club of Gujarat Ltd. v. CIT [1988] 171 ITR 504; [1988] 37 Taxman 38 held that one of the essential requirements of mutuality is that the contributors to the common fund are entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taxable under Section 2 (24) (vii) and will stand excluded from the principle of mutuality. The essence of the principle of mutuality lies in the commonality of the contributors and the participants who are also the beneficiaries. The contributors to the common fund must be entitled to participate in the surplus and the participators in the surplus are contributor to the common fund. The law envisages a complete identity between the contributors and the participants in this sense. The principle postulates that what is returned is contributed by a member. Any surplus in the common fund shall therefore not constitute income but will only be an increase in the common fund meant to meet sudden eventualities. A common feature of mutual organisations in general can be stated to be that the participants usually do no have property rights to their share in the common fund, nor can they sell their share. Cessation from membership would result in the loss of right to participate without receiving a financial benefit from the cessation of the membership. 21. Thereafter, reliance was placed in the case of C hief Commissioner of Income Tax v. Ranchi Club Limited reported in (1992) 196 ITR 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the facilities provided for members. 18. In short, there has to be a complete identity between the class of participators and class of contributors; the particular label or form by which the mutual association is known is of no consequences. Kanga and Palkhivala explain this concept in the Law and Practice of Income Tax (8th Edn., Vol. I, 1990) AT P. 113 as follows: 1. Complete identity between contributors and participator- ...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. The Madrass, Andhra Pradesh and Kerala High Courts have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves: it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects. 22. Lastly, the reliance was placed on the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the design of the second condition. Therefore, it stands violated. 23. Referring to the above decisions in the case of Secunderabad Club (supra), it was submitted that where non-members are offered facilities on payment of charge then the assessee is liable to be taxed on the income generated therefrom but there is no liability in respect of the profits made by the assessee company from the members who avail themselves of the facilities provided for members. 24. It was therefore submitted that the Tribunal has rightly followed the decision of this Court in the case of Sports Club of Gujarat Limited (supra) which now stands fortified by the Hon'ble Apex Court in the case of Secunderabad Club (supra) by remanding the matter to the Assessing Officer to verify the claim of the assessee company as to whether any outsider is provided service or not so as to tax accordingly. 25. It was therefore submitted that considering the settled legal position, no interference is required to be made in the impugned order of the Tribunal as no question of law arises from the same. 26. Considering the facts of the case and in view of the settled legal position, as narrated hereinabove, it would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 28. The contention raised on behalf of the appellant revenue based upon the findings arrived at by the CIT (Appeals), it is pertinent to note that none of the points which are considered by the CIT (Appeals) in the order would result into violation of principle of mutuality as stated hereinunder. 29. For applying the principle of mutuality, the three principles required to be considered are as under:- As per the three conditions stipulated by the Judicial Committee in the case of English and Scotish Joint Cooperative Wholesale Society v. CIT (AG) reported in (1948) 2 All England Reporter 395 (PC), existence of which establishes the doctrine of mutuality as follows:- (i) Identity of the contributors to the fund and the recipients from the fund. (ii) The treatment of the company, though incorporated, as a mere entity for the convenience of the members and policy holders, in other words in the instruments, obedient to their mandate. (iii) The impossibility that the contributors should derive profits from the contributions made by themselves to a fund which could only be expanded or returned to themselves. 30. In the facts of the case, the assessee company has received the contributi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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