Appeal No 204 of 1958
Appeal from the judgment and decree dated January 6 1956 of the Calcutta High Court in Income tax Reference No 74 of 1953
K N Rajagopal Sastri R H Dhebar and D Gupta for the appellant
Radha Binod Pal Panchanan Pal and D N Mukherjee for the respondents
March 26
The Judgment of the Court was delivered by SINHA J
The question for determination in this appeal on a certificate of fitness granted by the High Court of Calcutta is whether the respondent s admitted income tinder certain heads is chargeable to income tax under the provisions of section 106 of the Indian Income tax Act 1922 XI of 1922 hereinafter referred to as the Act
The Calcutta High Court by its judgment dated January 6 1956 answered the question in the negative disagreeing with the determination of the Income tax Appellate Tribunal by its order dated April 23 1949
The facts of this case upon which the decision of the appeal depends may shortly be stated as follows The respondent is a limited liability company incorporated on June 7 1933 with a view to taking over the assets and liabilities of an unincorporated association called  The Calcutta Stock Exchange Association 461 and to carrying on the affairs of the Stock Exchange which had been founded by that Association
The principal object of the Respondent Company is to facilitate the transaction of business on the Calcutta Stock Exchange
In view of that objective the Company had to make rules and by laws regulating the mode and the conditions in and subject to which the business of the Stock Exchange had to be transacted
The Company is composed of  members  who may be either individuals or firms who except in the case of parties who had been members of the unincorporated Association have to be elected as such and upon such elections have to acquire a share of the Company and pay an entrance fee
The members have to pay a monthly subscription according to the by laws of the Company
Under the by laws of the Respondent Company members with a certain standing are allowed to have Authorized Assistants  upto a maximum of six in number
Such Authorized Assistants are permitted the use of the premises of the Association and to transact business therein in the names and on behalf of the members employing them
The members have to pay an admission fee for such Authorized Assistants according to the following scale  a for the first two Assistants Rs1000 b for the third Assistant Rs2000 c for the fourth Assistant Rs3000 d for the fifth Assistant Rs4000 e for the sixth Assistant Rs5000 f for replacement Rs1000 The last item of replacement fee of Rs 1000 is meant to cover the fee for substituting one Assistant by another
Before these by laws were amended with effect from July 10 1944 a member could have more than six such Assistants but the number was limited to six by the new amendment which also provided that  Members who have more than six Assistants at present shall not be allowed any replacement unless the number of Assistants in their firms has come down to six maximum fixed
 Rule 5 as amended is in these terms 462 Every candidate applying for admission as Assistant to a member must serve at least for one year as a probationer in the firm of that member
A probationer must apply to the Committee through the member in whose office he will serve as probationer in such form as may be prescribed by the Committee by paying Rs 100 as probationer fee which will not be refunded in any circumstances 
It would thus appear that the rules relating to the admission of members  Assistants confer the benefit upon those members only either individuals or firms who are qualified according to the by laws to have such Assistants and who have paid admission fees and pay a monthly subscription in respect of each of them besides their own dues to the Company
The number of such Assistants has been sought by the by laws to be limited upto a maximum of six by imposing a progressively enhanced admission fee apparently with a view to discouraging the employment of a large crowd of such  Authorized Assistants
The by laws also provide that an authorized assistant shall not enter into any contracts on his own behalf and all contracts made by him shall be made in the name of the member employing him and such member shall be absolutely responsible for the due fulfilment of all such contracts and for all transactions entered into by the authorized assistant on his behalf It is also contemplated by the by laws that tickets have to be issued to the Authorized Assistants besides the members  tickets
The bylaws also contemplate that a member shall give to the prescribed Authority of the Company an immediate notice in writing of the termination of the employment by him of any Authorized Assistant and on such termination the right of the Assistant to use the rooms of the Association shall cease and he shall not be at liberty to transact business in the name and on behalf of his employer
The by laws also make provision for the supervision of the work of the Authorized Assistants to see that they function within the limits of their powers and do not transact 463 business on behalf of persons or firms other than those employing them
During the accounting year 1944 45 assessment year 1945 46 the Respondent Company received from its members the sum of Rs 60750 as entrance fees and the sum of Rs 15687 as subscription in  respect of the Authorized Assistants
The Company also received during the aforesaid year a sum of Rs 16000 as fees for putting the names of companies on the Quotations List
Unless a particular company s name is placed on the Quotations List no dealings in respect of the shares of that company are permitted on the Stock Exchange
An application has to be made by a member to place on the Quotations List any company not already included in that List and on approval by the prescribed Authority of the Company the name of the company thus proposed is included in the List upon payment of a certain fee
The companies themselves cannot apply to the Association for such enlistment
The application has to be made by a member and has to be accompanied by a fee of Rs 1000  and it is only after the necessary scrutiny and investigation into the affairs of the proposed company have been made that the enlistment applied for is granted
That is another source of income to the Respondent Company
It is no more necessary to refer to another item of income which was admitted during the course of the assessment proceedings in their appellate stage to be liable to the payment of tax
We are thus concerned in the present controversy with the aforesaid sums of Rs 60750  Rs 15687 and Rs 16000 which were held by the Income tax Officer by his order dated March 27 1946 to be liable to income tax
The Income tax Officer rejected the contention raised on behalf of the assessee Company that the Authorized Assistants aforesaid were themselves members of the Company and that therefore the moneys received from them were exempt from taxation
He also held that though the Respondent Company was a mutual Association each one of the three items of income referred to above was remuneration definitely related 464 to specific services performed and was thus chargeable to tax within the meaning of section 106 of the Act
On appeal the Appellate Assistant Commissioner by his order dated June 30 1947 considered the points at great length and came to the conclusion that the authorized Assistants were not members or substitute members
He held that the Authorized Assistants were no more than representatives of the members who employ them and they transact business on their behalf and that the Association had framed rules and by laws regulating the admission supervision and discontinuance of such Authorized Assistants
For coming to this conclusion he relied upon the decision of the Bombay High Court in the case of Native Share and Stock Brokers  Association vs The Commissioner of Income tax1
The case was then taken up in appeal to the Income tax Appellate Tribunal which dismissed the appeal
The Tribunal agreed with the finding of the taxing authorities that the Authorized Assistants were not members of the Company within the meaning of the Articles of Association of the Company and that their position was analogous to that of the  authorised clerks in Native Share and Stock Brokers  Association at Bombay 
In the course of its order the Tribunal observed as follows  The provision made in the regulations of the company by which a member can take advantage of sending his authorised assistants to the company for transacting the business in the member name is nothing but giving extra facilities to the members
By controlling the institution of authorised assistants the company renders specific services to the members and in particular to the member whose assistants work for him
The amounts received by the company from these sources are clearly covered by the provisions of section 106 
At the instance of the assessee the Tribunal stated a case and referred the following questions of law to the High Court for its decision under section 661 of the Act  1 Whether on the facts of this case the Incometax Appellate Tribunal was right in holding that 1 465 Authorised Assistants were not members of the company and as such the amounts of Rs 15687 and 60750 received from them as subscriptions and entrance fees respectively should be included in the assessable income
2 Were these amounts received for specific services performed by the Association or its members within the meaning of sub section 6 of section 10 of the Indian Income tax Act  3Whether the sums of Rs 16000 and Rs 600 were remuneration definitely related to specific services performed by the Association for its members within the meaning of subsection 6 of section 10 
The reference was heard by a Division Bench consisting of Sir Trevor Harries C J and Banerjee J of the Calcutta High Court
Before that Bench certain concessions were made
It was conceded by Dr Pal who also appeared before that Bench that the Authorised Assistants were not members of the Company
It was also agreed at the bar on behalf of both the parties that the two sums of Rs 60750 and 15687 were not received from the Authorized Assistants as suggested in the question formulated and that it was common ground that they were received from members of the Association in respect of their Authorized Assistants
Therefore the High Court took the view that the questions framed by the Tribunal did not arise and that the Tribunal bad proceeded on a wrong basis of facts
The High Court therefore re cast the questions in these terms  Whether in the facts and circumstances of this case the Income tax Appellate Tribunal was right in holding that athe amounts of Rs 15687 and Rs 60750 received from the members of the Association as subscriptions and entrance fees in respect of Authorized Assistants and b the amounts of Rs 16000 and Rs 600 received as fees for enlisting names of newly floated companies and for recognition of changes in the styles of firms respectively should be included in the assess
able income of the assessees 59 466 The Tribunal was asked to re state a case upon the questions as re cast extracted above
Accordingly the Tribunal drew up a fresh statement of the case and re submitted it to the High Court
On this re statement of the case the matter was heard by a Bench consisting of Chakravarti C J and Sarkar J
The High Court considered the terms of section 106 of the Act and came to the conclusion that the case had not been brought within those terms
The High Court in the course of its opinion observed that though the assessee is undoubtedly a trade association it did not perform any specific services for its members for remuneration
It then examined in detail the decision of the Bombay High Court in the case of Native Share and Stock Brokers  Association vs The Commissioner of Income tax 1 relied upon by the Department and observed that the differences pointed out between the case in hand and the case decided by the Bombay High Court were  not vital though they are not immaterial  but it was not prepared to take the same view of the facts of this case as had been taken by the Bombay High Court in the case referred to above or by the Travancore Cochin High Court in the case of Commissioner of Income tax vs Chamber of Commerce Alleppey 2
The High Court accepted the argument of Dr Pal which is also addressed to us that the words  performing specific services for  were far stronger and more definite than the words  render service to  and that those words meant the actual doing of definite acts in the nature of services
The Court further observed that those words meant  execute certain definite tasks in the interests and for the benefit of the latter that is to say the members under an arrangement of a direct character 
It further observed that the words  for remuneration and  definitely related to those services  meant that  certain specific tasks must be performed or functions of a specific character must be discharged for payment and such payment is to be made to the association as wages for its labour in respect of those tasks or functions 
In this connection 1 2 467 it may be added that the High Court also made the following observations bearing on the construction of the crucial words of section 106  When section 106 speaks of a trade professional or other similar association performing specific services for its members for remuneration it contemplates I think services in regard to matters outside the mutual dealings for which the Association was formed and for the transaction of which it exists as a mutual association
If performance of functions even in regard to matters within the objects of the association as a mutual association be performance of specific service within the meaning of the sub section dis charge of no function can be outside it and everything done would be specific service performed
That I do not think is what the sub section means and intends 
It is manifest that unless the assessee is brought within the terms of sub section 6 of section 10 the three items of income coming into the hands of the Association would not be chargeable to income tax
That subsection is in these terms  6 A trade professional or similar association performing specific services for its members for remu neration definitely related to those services shall be deemed for the purpose of this section to carry on business in respect of those services  and the profits and gains therefrom shall be liable to tax accordingly 
It has to be observed at the outset that the performing of the services of the description mentioned in that sub section may not but for the words of that section have amounted to carrying on business in respect of those services
The use of the word  deemed  shows that the legislature was deliberately using the fiction of treating something as business which otherwise it may not have been
It is also noteworthy that the sub section is couched in rather emphatic terms
We have therefore to examine the terms of the sub section to see whether the three sums of money in question or any of them are or is within the ambit of those terms
The words  performing specific services  in our opinion mean in the context  conferring particular benefits  on the members
The word 468  services  is a term of a very wide import but in the context of section 10 of the Act its use excludes its theolo gical or artistic usage
With reference to a trade pro fessional or similar association the performing of specific services must mean conferring on its members some tangible benefit which otherwise would Dot be available to them as such except for payment received by the association in respect of those services
The word  remuneration  though it includes  wages  may mean payment which strictly speaking may not be called wages 
It is a term of much wider import including recompense   reward   payment  etc
It therefore appears to us that the learned Chief Justice was not entirely correct in equating  remuneration  with  wages 
The sub section further requires that the remuneration should be  definitely related  to the specific services
In other words it should be shown that those services would not be available to the members or such of them as wish to avail themselves of those services but for specific payments charged by the association as a fee for performing those services
After these observations bearing on the interpretation of the crucial words we shall now examine each of the three items of income separately to determine the question whether they answer or any of them answers the description of  services  contemplated by the sub section
Firstly the sum of Rs 60750 has been realised from such members as applied for and obtained permission of the Association to have the use of Authorized Assistants within the precincts of the Stock Exchange
There cannot be the least doubt that unless those members paid the prescribed entrance fees for one or more Authorized Assistants upto a maximum of six they could not have the benefit thus conferred upon such members
Ordinarily a member has to transact business in the precincts of the Association by himself or by his business partner if there is a firm  but if that member is a very busy person and wishes to avail of the services of Authorized Assistants he has to pay the the prescribed fee
A member of the Association with the advantage of mutuality so long as he transacts 469 business within the precincts of the Association by himself or by his partner in the case of a firm is not required to pay any such entrance fee but only the fee payable by every member as such
The entrance fee thus is clearly chargeable only from such of the members as avail themselves of the benefit conferred by the rules of the Association in that behalf
The entrance fee is thus a price paid for the services of the Association in making suitable arrangements for an absentee member to transact business on his behalf and in his name by his representative or agent
The entrance fee in question therefore cannot but be ascribed to the specific services rendered by the Association in respect of Authorized Assistants who thus become competent to transact business on behalf of their principal
Coming next to the sum of Rs 15687 which was realised from the members by way of subscription in respect of their Authorized Assistants it is clear that this sum consists of the contributions severally made by the members periodically so as to continue to have the benefit conferred by the Association of having the use of their representative or agent even during their absence
There cannot be the least doubt that this is a very substantial benefit to those members who found it worth their while to engage the services of Authorized Assistants
A member is not obliged as indicated above to have such an Assistant but the fact that he chooses to have such an Assistant on payment of the prescribed fee or subscription itself is proof positive that a businessman who ordinarily thinks in terms of money has found it worth while to have the services of an Assistant by making an additional payment to the Association by way of recompense for the benefit thus conferred upon him
Lastly the sum of Rs 16000 represents fees received from members for allowing their application for enlisting the names of companies not already on the Quotations List so that the shares and stocks of these companies may be placed on the Stock Market
As already indicated it is not the company concerned which has directly to pay this fee but the fee has to 470 be paid by the member who initiates the proposal and apparently finds it worth his while to pay that prescribed fee to the Association
He would not make the payment unless he found it worth his while to do so Apparently such a member is interested in placing the stocks of that company on the market
It cannot therefore be denied that that sum of money is definitely related to the specific services performed by the Association namely to permit transactions in respect of the shares of the company concerned which services would not otherwise be available to the members as a body or to the individual member or members interested in that company
In our opinion therefore each one of the three sources of income to the Association accrues to it on account of its performing those specific services in accordance with its rules and by laws
Each one of the three distinct sources of revenue to the Association is specifically attributable to the distinct services performed by the Association for its members or such of them as avail themselves of those benefits
And each one of those services is separately charged for according to the rate or schedule laid down by the rules and by laws of the Association
In our opinion therefore the requirements of sub section
6 of section 10 have been fulfilled in the present case
But we have yet to deal with the last argument accepted by the High Court with reference to the terms of sub section
6 of section 10 namely that the services contemplated therein have reference to  matters outside the mutual dealings for which the Association was formed 
In the first place there is no warrant for limiting the application of the words used by the legislature in the way suggested
Secondly the mutuality of the Association extends only to such benefits as accrue to every member on the payment made by him to the Association but even if additional items of payment have to be made for additional services to be performed by the Association only for such of the members as avail themselves of those benefits it cannot be said that the mutuality extends to those additional benefits also
It is in our opinion 471 equally wrong to suggest that the services in question should have been outside the objects of the Association
If the Association renders services to such of its members as avail themselves of such services as are not within the scope of the business activities of the Association those benefits if any would not be  conferred by the Association as such because the Association has to function within the scope of its objects of incorporation
Hence on a true construction of the provisions of the sub section in question we have come to the conclusion that the facts and circumstances of the present case bring the three items of income of the Association within the taxing statute
In our opinion the decision of the Bench of the Bombay High Court consisting of Stone C J and Kania J as he then was in the case of Native Share and Stock Brokers  Association vs Commissioner of Income tax is correct and the facts of that case run very parallel to those of the case in band though there may be minor differences in the rules and by laws of the Association then before the Bombay High Court
In that case as in the present one the rules of the Stock Brokers  Association the Bombay Stock Exchange contemplated a definite scheme for allowing members to employ authorized clerks and for the admission conduct control and supervision of those clerks for the benefit primarily of the members who employed them
It was held by the High Court that the income received by the Association by way of fees in respect of those authorized clerks was within the taxing statute and liable to income tax
After examining in detail the provisions of the rules and the by laws of the Association Stone C J made the following observations which are equally applicable to the rules and by laws of the Association in the present case   In my judgment these rules lay down a definite scheme and provide an organised arrangement controlled and supervised by the Association for the benefit of its members
In my opinion the carrying 1 472 of their scheme into effect is performing services for its members by the Association
No doubt the benefit of the scheme would redound to the benefit of all members since all would have the advantage of disciplined supervision exercised over the authorised clerks and remisiers of the others
I do not think that because the payment for the carrying of the scheme is provided for only by members who avail themselves of the use of the authorised clerks it makes any difference
 Kania J as he then was in a separate but concurring judgment made the following very pertinent observations  A perusal of the rules referred to in the judgment of the learned Chief Justice shows that the institution of authorised clerks exists for the benefits only of those who pay remuneration of Rs 100 instead of going to the market and carrying on their business themselves
Individual members are permitted to work through an agent
For that the charge is made
The rules provide for the application and grant for such permission registration of the authoris ed clerks on the individuals being recognised as clerks of particular members supervision over the work of such clerks and particularly to prevent them from registering contracts either in their own name or in the name of another member and a general supervision over their good behaviour is contemplated  
A question was raised as to whether these are specific services to be performed for particular members or whether the rules amount to performance of duties towards members in general
It is true that several of the services to be rendered may be helpful to the other members for their business
Taken as a whole I consider that as a performance of services by the Association for the benefit of members who pay the remuneration
 We have made these copious quotations from the judgment of the Bombay High Court because in our 473 opinion they truly apply the provisions of sub section
6 of section 10 to associations like the one before us
The other case to which our attention was drawn is Commissioner of Income tax vs Chamber of Commerce Alleppey 1
The facts of that case are not similar to those of the case before us but the ratio decidendi of that case are relevant
That case referred to the Alleppey Chamber of Commerce
The Chamber inaugurated a produce section with the object of promoting the interests of merchants in general and of those engaged in the produce trade in particular of acting as arbitrators and collecting and publishing information relating to the produce trade
Members were admitted to the produce section on payment of admission fees monthly fees and contributions at certain prescribed rates
The question which was referred to the High Court was whether the receipts by way of fees and contributions could be chargeable under section 106 of the Act and it was answered in the affirmative
Though cases in England by way of precedent for the decision of the case in hand have not been cited at the Bar apparently because the scheme of the Income tax law in England is different and the words of the statute are not in parti material yet there are some cases which throw some light on the controversy before us
For example the case of The Carlisle and Silloth Golf Club vs Smith Surveyor of Taxes 2  related to a golf club which was not incorporated
It was admittedly a bonafide members  club but under one of the terms of its lease it had to admit non members to play on its course on payment of  green fees  at certain prescribed rates
Those fees were paid by non members
Receipts from those fees were entered in the general accounts of the Club thus showing an annual excess of receipts over expenditure of the Club as a whole
It was held by Hamilton J as he then was that the Club carried on a concern or business in respect of which it received remuneration which was assessable to income tax
He pointed out that the 1 2 60 474 receipts from non members went to augment the funds of the Club and the revenue thus received was applied for the purposes of the Club towards its general expenditure
The case was taken up to the Court of Appeal and the decision of that Court is reported in the same Volume at p 198
The Court of appeal affirmed the decision and dismissed the appeal
The Judgment of the King s Bench Division in The Liverpool Corn Trade Association Limited vs Monks H M Inspector of Taxes 1 was based on facts which are similar to the facts of the present case
In that case the Liverpool Corn Trade Association Limited was an incorporated body under the Companies Act with the object inter alia of protecting the interests of the corn trade and of providing a clearing house a market an exchange and arbitration and other facilities to the trade
Membership of the Association was confined to persons engaged in the corn trade
Each member was required to have one share in the company and had to pay an entrance fee and an annual subscription
Non members could also become subscribers
Payments were made to the Association by members and others for services rendered through the clearing house etc
The assessee was taxed on the excess of its receipts over expenditure
On appeal to the Special Commissioners they upheld the assessment
One of the points raised before the Special Commissioners was that transactions with its members were mutual ones and that any surplus arising from such transactions was not a profit assessable to income tax
On appeal the High Court agreed with the determination of the Special Commissioners and held that any profit arising from the Association s transactions with members was assessable to income tax as part of the profits of its business and that the entrance fees and subscriptions received from members must be included in the computation of such profits
It was suggested that the service in this case if any was extremely trivial and the remuneration which was large was for that reason not definitely related to the 1 475 service
It was held by Upjohn J in Bradbury H M Inspector of Taxes vs Arnold 1 that the extent of the services was of no materiality
There the question was being dealt with under Case VI of Schedule D of the Income tax Act 1918
The learned Judge observed   There is no doubt that a contract for services may and clearly does form a matter for assessment under Case VI of Schedule D and not the less so that the services to be rendered are trivial or that they are to be rendered once and for all so that the remuneration may be regarded as a casual profit arising out of a single and isolated transaction
The same view was expressed by Harman J in Housden Inspector of Taxes vs Marshall 2
In that case a well known jockey contracted with a newspaper company to make available to its nominee  reminiscences of his life and experiences on the turf for the purpose of writing a series of four articles  and to provide photographs press cuttings etc
He was paid pound 750
The question was whether this amounted to sale of property or was a payment for services rendered
It was held that it was the latter and that it did not matter if the service rendered was trivial
In view of what we have said above as to the nature of the service which the Association performed in respect of the Assistants the payment of the fee was definitely related to that service
It is therefore plain that the case fell within section 106 of the Act
It must therefore be held that the question referred to the High Court should have been answered in the affirmative and that the High Court was in error in giving its opinion to the contrary
The appeal must accordingly be allowed with costs here and below
1  669
Appeal allowed


Summary:
The appellant assessee was issued a notice under Section 23A of the Income tax Act 1922
The assessee contested the same
At the same time it set apart a sum of Rs 652000 in its books for the year ending 31st March 1956 to meet the contingency that may arise if his plea failed
During the year 1958 59 an amount of Rs 202000 out of the said amount was transferred to the profit  loss account Me balance amount of Rs 450000 continued to remain and was shown as a provision set apart to meet the aforesaid contingent liability
The assessee has been contesting the said proceedings
Ultimately it succeeded before the High Court which held that no action could be taken against the assessee under Section 23A
For the assessment year 1963 64 in proceedings under the  the assessee claimed that the said sum of Rs 450000 was a reserve and should be included in its capital
The Income tax Officer did not agree
Ultimately the matter reached the Tribunal which agreed with the assessee
At the instance of Revenue the question as to whether the sum of Rs 450000 set apart for contingent liability taxation was to be included in the computation of capital of the assessee company under Rule 1 of the Second Schedule of the was referred to the High Court
The High Court having answered the question against the assessee the assessee has preferred the present appeal contending that inasmuch as no order levying additional tax under Sec
23A was made the amount could not be treated as a provision
109 110 Dismissing the appeals this Court HELD  11
Provisions made against anticipated losses and contingencies are charges against profits and therefore to be taken into account against gross receipts in the PL accounts and the balance sheet
On the other hand reserves are appropriations of profits the assets by which they are represented being retained to form part of the capital employed in the business
112G 12
In the instant case the provision made by the assessee in its Books for meeting the anticipated liability of tax under Section 23A of the Income Tax Act 1922 was indeed a provision and not a reserve
The assessee Itself called it a provision
It did not call it a reserve nor was the amount set apart or appropriated as a reserve
It is not to suggest that the description given or the Book entries made by the assessee are conclusive but to emphazise how the assessee understood the said item itself In the circumstances of the case the High Court was right in holding it to be a provision and not a reserve and so the amount of Rs 450000 was not to be included in the computation of Capital of the assessee Company
113E Metal Box Company of India Limited vs Their Workmen and Vazir Sultan Tobacco CoLtd
vs Commissioner of Income Tax Andhra Pradesh etc
  relied on