IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Date of Decision : 14.09.2011 C.W.P.No.6397 of 1987 Escorts Dealers Development Association Ltd. ...Petitioner Versus Union of India and others ...Respondents C.W.P.No.7406 of 1988 Escorts Dealers Development Association Ltd. ...Petitioner Versus Union of India and others ...Respondents C.W.P.No.5741 of 1990 Escorts Dealers Development Association Ltd. ...Petitioner Versus Union of India and others ...Respondents C.W.P.No.6398 of 1987 Escorts Dealers Development Association Ltd. ...Petitioner Versus Union of India and others ...Respondents C.W.P.No.7405 of 1988 Escorts Dealers Development Association Ltd. ...Petitioner Versus Union of India and others ...Respondents C.W.P.No.5742 of 1990 Escorts Dealers Development Association Ltd. ...Petitioner Versus Union of India and others ...Respondents Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 C.W.P.No.5739 of 1990 Escorts Dealers Development Association Ltd. ...Petitioner Versus Union of India and others ...Respondents C.W.P.No.5740 of 1990 Escorts Dealers Development Association Ltd. ...Petitioner Versus Union of India and others ...Respondents CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA HON’BLE MR. JUSTICE JASWANT SINGH 1. Whether Reporters of local papers may be allowed to see the judgment? 2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present : Mr. Akshay Bhan, Advocate, for the petitioner in all the cases except Mr. Himanshu Aggarwal, Advocate in CWP 7405 of 1988. Mr. Tejinder K. Joshi, Advocate, for the respondents. HEMANT GUPTA, J. This order shall dispose of CWP No.6397 of 1987, wherein the petitioner has sought quashing of the notice issued under Section 148 of the Income Tax Act, 1961 (for short ‘the Act’) for the Assessment Year 1978- 79 as well as the following writ petitions challenging levy of Tax under Section 104 of the Act: Sr.No. CWP No. Assessment Year 1. CWP No.7406 of 1988 1979-80 2. CWP No.5741 of 1990 1982-83 3. CWP No.6398 of 1987 1983-84 4. CWP No.7405 of 1988 1984-85 5. CWP No.5742 of 1990 1985-86 2 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 6. CWP No.5739 of 1990 1986-87 7. CWP No.5740 of 1990 1987-88 In the aforesaid seven writ petitions, the revenue’s appeal before Income Tax Appellate Tribunal in respect of the assessment proceedings was said to be pending in view of the decisions of the Commissioner of Income Tax (Appeals) holding that the income of the assessee is not chargeable to tax on the principle of mutuality, but the petitioner, as an investment company, has been charged Tax at the rate of 50% of the Income being less than the fixed percentage in terms of Section 104 of the Act. The petitioner Company was incorporated under the provisions of the Companies Act, 1956 with the main object of the organizing the Company as a Mutual Benefit Association to promote, protect and advance the business interests of dealers of motor-cycles, scooters, mopeds, tractors, manufactured and/or sold by M/s Escorts Limited. The Memorandum & Articles of Association prescribes the qualification for membership. As per Clause 1 of Chapter II of the Articles, any person, sole proprietorship concern, firm through its partners, Joint Hindu Family through Karta, Company, Registered Co-operative Society or any other corporate body, having a place of business anywhere in India and actually carrying on or intending to carrying trading in activity in products can be admitted as members subject to the conditions mentioned therein. The ‘product’ has been defined in Chapter I Clause 3(h) of the Articles to mean Motor Cycle, Scooter, Moped, Tractor being manufactured and/or sold by Escorts Ltd. and dealt in by the dealers. In view of the said Memorandum & Article of Association, the petitioner claims that it does not earn any income, which is 3 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 taxable on the basis of principle of mutuality and has filed its return accordingly. The Income Tax Appellate Tribunal decided in relation to the Assessment Year 1983-84 that the income of the assessee is exempt from income tax on the principal of mutuality. The said decision became the basis for the decision of the Commissioner of Income Tax in relation to seven assessment years as mentioned above. The Income Tax Reference No.3 of 1998 arising out of the order of the Tribunal pertaining to the Assessment Year 1983-84 and Income Tax Appeal No.1 of 2000 pertaining to Assessment Year 1990-91 came up for consideration before this Court on 19.09.2011. The question referred for the opinion of this Court was: “Whether on the facts and in the circumstances of the case, the learned Tribunal is right in law in holding that the surplus of the company on account of entrance fee, contribution from the members and forfeited amount of ex-members was not liable to tax as income from business thereby deleting the addition of Rs.3,88,904/-?” The said question was answered in favour of the assessee and against revenue by this Court. It was inter-alia observed: “The Articles of Association have been placed on record. One of the main objects was ‘to organize the Company as a Mutual Benefit Association….. ” Article 11 of the Memorandum of Association further provides that “the income and property of the company whenever derived shall be applied solely for the promotion of its objects as set-forth in the Memorandum”. It was also laid down that “no portion of this income or property aforesaid shall be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to persons who, at any time are/or have been members of the Company or to any one or more of them or to any persons claiming through any one or more of them”. In view of these provisions in the Memorandum of Association, the Tribunal ahs recorded a firm finding in favour of the Assessee. There appears to be no ground to take a different view.” xxx xxx xxx 4 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 “In view of the above, we hold that the Assessee is a Mutual Benefit Association. The Revenue having not raised the question that the Assessee is different from its members, the argument as now sought to be raised cannot be accepted.” Before this Court, learned counsel for the petitioner has argued that in view the principle of mutuality, as laid down in the case of the petitioner itself by the Division Bench of this Court, the notice issued under Section 148 of the Act is liable to be set aside. Since there is no distributable income in the hands of the Assessee, therefore, the provisions of Section 104 of the Act are not attracted and, thus, the action of the respondents in claiming tax on the deemed income is not tenable. Though the issue is concluded by the aforesaid judgment of the Division Bench of this court, but with the assistance of the learned counsel for the parties, we have re-examined the issue as well. The learned counsel for the petitioner relies upon the judgments of Hon’ble Supreme Court in Commissioner of Income Tax Vs. Bankipur Club Ltd. (1997) 226 ITR 97 and Chelmsford Club Vs. Commissioner of Income Tax (2000) 243 ITR 89 apart from the two other Division Bench judgments of this Court in ITR No.68 of 1996 titled “The Commissioner of Income-Tax, Jalandhar Vs. M/s Ludhiana Aggarwal Cooperative House Building Society Limited, Aggar Nagar, Ludhiana” decided on 13.09.2007 and ITA No.677 of 2009 titled “All India State Bank of Patiala Employees Welfare Society (Regd.) Vs. Commissioner of Income Tax, Patiala and another” decided on 06.04.2011 in support of the argument that the members of the Company alone contribute to its funds and the activities of the company are restricted for the benefits of its members alone. It is contended that no person can earn from himself, 5 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 therefore, keeping in view the doctrine of mutuality, the petitioner does not earn any income, which is taxable. In English and Scottish Joint Co-operative Wholesale Society Ltd. Vs. Commissioner of Agri. I.T.Assam (1948) 16 ITR 270 (PC), the question arose as to whether a business carried on by a society or company, who cultivates produce on its own land and sells it exclusively to its members, is by its nature incapable of begetting profits as is understood in the Assam Agricultural Income Tax Act. The Privy Council held that the judgment of Madras High Court reported in (1929) 3 ITC 385 (Mad.) English and Scottish Joint Co-operative Wholesale Society Ltd. Vs. Commissioner of Income-Tax, Madras, is wrongly decided. In the aforesaid case, the privy Council discussed the basis for the applicability of doctrine of mutuality, inter alia, for the reason that: “It is also to be observed that in (1889) 14 A.C. 381 New York Life Insurance Co. Vs. Styles and similar cases the contributors to the common fund and the participators in it are two identical bodies. The role of the association is to collect from the associates the contributions to the common fund and to make the payments from it in accordance with the contributors’ mandate, and this mandate may be and usually is written into the constituent documents of the association, which may or may not be a corporation. The association is therefore no more than a convenient agent for carrying out what the associates might more laboriously do for themselves.” It was observed that the said principle cannot apply to an association, Society or a company which grows produce on its own land or manufactures goods in its own factories, using either its own capital or capital borrowed whether from its members or from others, and sells its produce or goods not to its members exclusively. The existence of 6 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 conditions for the applicability of doctrine of mutuality was culled down as under: “From these quotations, it appears that the exemption was based on (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 policyholders, 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.” In Bankipur Club’s case (supra), the Hon’ble Supreme Court has quoted from British Tax Encyclopedia (I) dealing with “Mutual trading operations”. The concept is that a man could not make a profit by trading with himself. The relevant extract reads as under: “In British Tax Encyclopedia (I) 1962 edition (edited by G. S. A. Wheatcroft) at pages 1200 and 1201, dealing with “Mutual trading operations”, the law is stated, thus: “In several early cases there were dicta to the effect that a man could not make a profit by trading with himself; this developed into the proposition that when persons contribute to a common fund in pursuance of a scheme for their mutual benefit, having no dealings or relations with any outside body, they cannot be said to have made a profit when they find they have overcharged themselves and that some portion of their contributions may be safely refunded. It has also been established that the same principle applies although the contributors incorporate themselves into a separate entity to carry out the mutual scheme and the surplus contributions are put to reserve and not immediately returned. For this doctrine to apply it is essential that all the contributors to the common fund are entitled to participate in the surplus and that all the participators in the surplkus are contributors, so that there is complete identity between contributors and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate; it does not matter 7 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 that the class may be diminished by persons going out of the scheme or increased by others coming in …. The doctrine now has application in three areas. First, it applies to mutual insurance companies; secondly, it applies to certain municipal undertakings and, thirdly, to members’ clubs, and mutual associations generally, whether incorporated or unincorporated, except registered industrial and provident societies …. “ xxx xxx xxx “Under the Income-tax Act, what is taxed is, the “income, profits or gains” earned or “arising, “accruing” to a “person”. Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise.” The Hon’ble Supreme Court held that the arrangement or relationship between the club and its members should be of non-trading character quoting from the Privy Council judgment referred to above. The Hon’ble Supreme Court approved the view of the High Court that the activities of the club were not done with the motive of profit earning, which can be said to be tainted with commerciality and that profits arising from the sale of drinks to the regular members of the clubs is entitled to exemption on the doctrine of mutuality. Later in Chelmsford Club’s case (supra), the Hon’ble Supreme Court held that a conjoint reading of Sections 2(24), 14, 22 and 23 of the Act also makes it abundantly clear that what is being taxed under Section 22 8 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 is the ‘deemed income’ for an assessee from the property owned by him and that what is being taxed under Section 22 of the Act is, in fact, tax on income and not on the property. The Hon’ble Supreme Court observed that Section 2(24) of the Act recognizes principle of mutuality and has excluded all business involving such principle from the purview of the Act, except those mentioned in Clause (vii) thereof. It was found that the business of the appellant therein does not come within the scope of business referred to in sub clause (vii). The Court considered the judgment in Commissioner of Income Tax Vs. Royal Western India Turf Club Ltd. (1953) 24 ITR 551 in which the assessee was carrying on horse racing and realizes money both from the members and from non-members for the same consideration. In the aforesaid case, the court was not considering that what kinds of business other than mutual insurance may not claim exemption from tax liability under Section 10(1) of the Income Tax, 1922, which is in pari materia with Section 2(24). But it was held that the law recognizes the principle of mutuality excluding the levy of income tax from the income of such business to which, the principles laid down in English and Scottish Joint Co-operative Wholesale Society Ltd. case (supra) are applicable. A Division Bench of this Court in M/s Ludhiana Aggarwal Cooperative House Building Society Ltd. case (supra), has considered the judgments in Chelmsford Club and Bankipur Club Ltd. cases (supra) and applied the doctrine of mutuality to an assessee, a Cooperate Housing Society, who has allotted plots of land to its members and recovered certain charges. The transfer fee collected by the Society was utilized to provide various facilities to its residents/members as also for running the school, hospital and the community centre. Thus, it was held that there is no commercial or trading activity being carried out by the assessee. Similarly 9 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 in All India State bank of Patiala Employees Welfare Society (Regd.) case (supra), it was observed as under: “….The High Court, while allowing the appeal of the assessee held that the source of funds was only from the members of the assessee and it had not received any donations or other monetary grants from any outside source apart from the members during the two relevant assessment years. The bank in which the surplus funds were deposited, no doubt, formed a third party, but the identity between the contributors and the recipients was not lost. The funds had been applied for the benefit of the members who contributed it. The interest on investments and dividend earned on shares was only a portion of the total income earned by investment of the surplus funds wholly contributed by the members of the assessee for the relevant assessment years. The income earned as interest on investment and dividend on shares was relevant assessment year.” In the present case, the object of the Company is Mutual Benefit. Such fact is admitted by the Department in Para 12 of the written statement. The membership of the petitioner-assessee is restricted to the dealers of the products manufactured by M/s Escorts Ltd. The entire contribution received from the members is utilized for the purposes of members including the advertisements, which are also for the benefit of the members. Thus, the petitioner-assessee is a Mutual Benefit Association and keeping in view the doctrine of mutuality, there is no taxable income in the hands of the petitioner. Section 104 of the Act provides that where the dividends distributed by any company within 12 months immediately following the expiry of that previous year are less than the statutory percentage of the distributable income of the company of that previous year, then such company shall be liable to pay income tax at the rate of 50% in case of an investment company, 37% in case of a trading company; and 25% in case of any other company. 10 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh C.W.P.No.6397 of 1987 In view of our findings recorded above, the company has no income, which was required to be distributed. Therefore, the company cannot be charged at the fixed rate of tax for not declaring dividend, which is less than the statutory percentage. Thus, the orders passed calling upon the petitioner to pay fixed rate of income tax in exercise of the powers under Section 104 of the Act are legal and tenable. Consequently, all the writ petitions are allowed. The impugned orders are set aside. (HEMANT GUPTA) JUDGE September 14, 2011 (JASWANT SINGH) Vimal JUDGE 11 Kumar Vimal 2004.12.23 05:38 verified P&HC Chandigarh