Dr. B.P. Saraf, J.
1. By this reference made in pursuance of the direction of the High Court at Bombay under section 256(2) of the Income-tax Act, 1961 ('the Act') at the instance of the Revenue, the Income-tax Appellate Tribunal has referred the following three question of law to this court for opinion :
'(1) Whether the Tribunal erred in holing that the decision of the Bombay High Court in the assessee's own reference for the assessment year 1949-50 concluded the question of assessability of laga receipts against the Revenue
(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the test of mutuality was fully satisfied with regard to laga receipts
(3) Whether, on the and in the circumstances of the case, laga receipts were income assessable to tax
2. The facts giving rise to this reference are as follows : The assessee Bombay Oilseeds and Oil Exchange Ltd. Bombay is a company incorporated under section 26 of the Indian Companies Act, 1913. It runs an exchange for transacting business in oil, oil seeds, etc. Under its bye-law No. 331(1), it is entitled to charge on each transaction of sale 'lagas', i.e. cess at the stipulated rates. Bye-law No. 331(f) authorises the board, subject to the approval of the general meeting to decide the manner and method of distribution and/or utilisation and/or apportionment and/or proportion of distribution of the money recovered as laga or cess under these bye-laws and other bye-laws and/or contract, terms or forms. In pursuance of this power, the general meeting of the members of the assessee held on June 6, 1959, resolved that one-third of the amount of laga received be credited to the reserve fund of the exchange, that 50% of the remaining two-thirds be credited to Shubhlaxmi Fund, that 25% of the two-third be paid to Patan Pinjra Pole. Article 105 of the articles of association of the company provides that the property, capital and income of the exchange whensoever derived shall be applied solely towards the promotion of the objects of the company and no portion thereof shall be paid by way of bonus or otherwise to the members, except as provided in articles 7 and 111 and except in the case of the winding up of the exchange. Article 7 relates to the deposits made by members. Clause (a) thereof provides for payment of interest at a rate to be fixed by the board not exceeding 1/2% on the deposits made by members while sub-clause (2) provides that a member shall not be entitled to withdraw the deposit so long as he continues to be a member of the exchange. Article 111 provides that on the winding up of the exchange, if there are any surplus assets left after the payment and discharge of the debts and liabilities of the exchange, such surplus assets shall be equally divided amongst all members, who had paid in full all the amounts due to the exchange and who were on the register of members on the day of the commencement of winding up.
3. Since the incorporation of the company till January 9, 1963, there was only one category of membership. On January 10, 1963, the articles of the company were amended to add a new class of members called associate members or special associate members. On July 25, 1963, the articles were again amended so as to omit these additional categories of members. In the assessment year 1963-64, there was no special associate member. There was one associate member who had not paid any sum by way of laga. In the assessment years 1964-65 and 1965-66, there was neither any associate member, nor any special associate member. The assessee received by way of laga total amounts of Rs. 1,01,740 Rs. 71,645 and Rs. 90,461 in the three years under consideration. In its assessment under the Income-tax Act, the assessee claimed that the laga receipts did not constitute its income on the principle of mutuality. The Income-tax Officer did not accept this contention of the assessee and held that the principle of mutuality was not satisfied in the case of the assessee. He, therefore, assessed the laga receipts in the assessable income of the assessee in all the three assessment years and subjected the same to tax.
4. The assessee preferred appeal before the Appellate Assistant Commissioner wherein it was contended that the 'laga' receipt was not liable to tax on the ground of mutuality. The assessee relied on the decision of this court in Surat District Cotton Dealers' Association v. CIT : [1959]35ITR121(Bom) . The Appellate Assistant Commissioner did not accept the contention of the assessee. According to him, the decision of this court relied upon by the assessee was not applicable to the facts of the assessee's case. He relied on an earlier decision of this court in East India Chamber of Commerce Ltd. v. CIT : [1957]31ITR791(Bom) , which according to him, was more apposite and, following the same, held that the principle of mutuality was absent in the case of the assessee. The Appellate Assistant Commissioner, therefore, rejected the appeals of the assessee.
5. The assessee thereupon preferred appeals before the Tribunal. The Tribunal accepted the contention of the assessee and held that the 'laga' receipts did not constitute the income of the assessee and, as such, were not liable to assessment under section 28(i) of the Income-tax Act, 1961 (corresponding to section 10(1) of the Indian Income-tax Act, 1922). While doing so, it followed the decision of this court in the case of Surat District Cotton Dealers' Association : [1959]35ITR121(Bom) . The Tribunal further held that the test of mutuality was satisfied in the case of the assessee. While arriving at this conclusion, the Tribunal referred to article 331 (f) of the articles of association and observed that in the present case, the right of all the members to contribute to the laga fund was a subsisting right which could be exercised without the removal of any impediment and all the member could, therefore, exercise their right to contribute to the laga funds. In these circumstances, it was held by the Tribunal that the laga receipts were not taxable in the present case as they satisfied the principle of mutuality.
6. Aggrieved by the order of the Tribunal, the Revenue applied for reference under section 256(1) of the Act which was rejected by the Tribunal. The Revenue moved the High Court under section 256(2) of the Act against the order of the Tribunal refusing to make a reference and the High Court, on being satisfied that the questions set out above did arise out of the order of the Tribunal, directed the Tribunal to refer the same to this court. In pursuance of the said direction, this reference has been made by the Tribunal to this court.
7. We have heard counsel for the parties. The submission of learned counsel for the Revenue is that the test of mutuality is not satisfied in the instant case as the participants of the fund were various charitable funds and not members who were the contributors. It was also pointed out that under the articles of association of the assessee, on the winding up of the company, all the members could become participators though they had not contributed to the fund. This factor, according to counsel for the Revenue, will also operate against the principle of mutuality. Reliance was placed in this connection on the decision of this court in the case of East India Chamber of Commerce Ltd. : [1957]31ITR791(Bom) . According to counsel for the Revenue, the decision of this court in the assessee's own reference for the assessment year 1949-50 holding that section 10(6) of the Indian Income-tax Act, 1922 (corresponding to section 28(iii) of the 1961 Act) is not applicable inasmuch as this court in that case did not lay down any proposition of law but arrived at its finding on a consideration of the facts available to it. According to learned counsel, in the instant case the laga receipts constitute income of the assessee, and the same is, therefore, chargeable to tax.
8. The submission of counsel for the assessee, on the other hand, is that the decision of this court in the assessee's own reference for the assessment year 1949-50 is fully applicable to the case of the assessee for the years under reference. According to him, the question whether the laga receipts were liable to tax or not stands concluded by the above decision of this court. (Reference No. 33 of 1952). In the alternative, the submission of counsel is that on the facts the principle of mutuality is fully applicable to the assessee's case inasmuch as there is complete identity between the contributors to the fund and the participators thereof. It was pointed out that under the bye-laws of the assessee-company all the transactions put through by the members through the exchange (assessee) were liable to laga and in the event of dissolution, all the members without any reservation were entitled to share in the distribution of the surplus. Article 111 of the articles of association of the company was referred to in support of this argument. It was, therefore, submitted by counsel for the assessee that even if it were to be assumed for the sake of argument that there were some members who did not transact any business and, therefore, did not pay any laga, the fact remained that they had a right to contribute laga by putting through the transactions and there was no impediment in the way of their right to contribute laga by putting through the transactions. He relied upon the decision of this court in the case of Surat District Cotton Dealers' Association : [1959]35ITR121(Bom) . Counsel submitted that the decision of this court in East India Chamber of Commerce Ltd. : [1957]31ITR791(Bom) did not apply to the facts of the present case. He further pointed out that the identity of the participators in the common fund has to be considered with reference to the position prevailing at the time of the ultimate winding up of the company and not with reference to the position obtaining at an interim stage. It was submitted that the distribution of laga receipts to various funds was caused by common consent of all the members and they were always free to cancel the same and pass a fresh resolution as they liked. The use of the laga receipts for the various purposes set out in the resolution, according to learned counsel, in fact amounted to notional receipt of the said fund by each member individually and collective utilisation thereof by the members for the purposes laid down in the resolution. Counsel further submitted that so long as the laga receipts were used with the full consent of all the members, objection cannot be levelleded that the participators were not the members who contributed to the common fund. By way of alternative argument, learned counsel also submitted that the entire amount received by the assessee by way of laga having been spent for various purposes already decided by the members by resolution passed as far back as in the year 1959, there was a diversion of income by overriding title and that being so, nothing was left with the assessee for the purposes of assessment even if it was held that the receipts in question amounted to income in the hands of the assessee.
9. We have carefully considered the rival submissions. Before we deal with the principle of mutuality, the essence thereof and the question as to whether the facts necessary for the application of the said principle exist in the case of the assessee, it may be expedient to deal with two other submissions, viz., the effect of the decision of this court in the assessee's own reference for the assessment year 1949-50 and the contention based on diversion of income by overriding title.
10. So far as the decision of this court dated March 6, 1953, in the assessee's own case for the assessment year 1949-50 (which is numbered as Reference No. 33 of 1952, and reported in Unreported Income-tax Judgments of the Bombay High Court, book one at page 211) is concerned, we find that the said judgment has not laid down any law of general application. It was rendered on the facts of the case before the court. In that case, the limited question before the court was whether the sum of Rs. 1,76,097 received by the assessee by way of laga was liable to tax under section 10(6) of the Indian Income-tax Act, 1922 (corresponding to section 28(iii) of the 1961 Act). It was noticed by this court that in order to bring the receipt by way of laga to tax under section 10(6) it was necessary for the Department to establish that the association performs specific services for its members for remuneration and that the receipts in question related to such specific services rendered by the association to its members. As in the aforesaid case the taxing authorities had failed to find any specific service, it was held that resort cannot be had to section 10(6) of the 1922 Act. This judgment thus does not lay down any proposition of law of general application. Besides the question in the aforesaid case being limited to the applicability of section 10(6) of the 1922 Act, the question whether the receipts otherwise amounted to income under the general principles of law under section 10(1) of the 1922 Act (corresponding to section 28(i) of the 1961 Act) did not arise for consideration and, as such, the same was not decided by the court. This view of ours also gets support from the later decision of this court in East India Chamber of Commerce Ltd. : [1957]31ITR791(Bom) . In this case, this court first considered the question whether tax was payable on laga receipts under section 10(6),of the 1922 act and on perusal of the facts having come to a conclusion that the case did not fall under section 10(1), considered the question whether the laga receipts were liable to tax under section 10(1) of the 1922 Act, as business income and examined the same on the principle of mutuality.
11. It is thus clear that the earlier decision of this court in the assessee's own case did not conclude the question of assessability of laga receipts in the case of the assessee in general. The first question referred to us, therefore, has to be answered in the negative.
12. Next, we may consider the submission of the assessee regarding diversion of income by overriding title. In the instant case, there is no dispute that if the laga receipt constituted income, it was received by the assessee. What the resolution of the members passed in the general meeting in 1959 purported to do was to decide how the amount received by the assessee from laga had to be applied. It is a well settled legal proposition that an obligation to apply income which has accrued or arisen or has been received amounts merely to the apportionment of the income and not to its diversion. An obligation to use the income in a particular manner does not remove it from the category of income even if such obligation is part of the original contract giving rise to the income. Once income has come to the hands of the assessee, it will be liable to Income-tax whatever may be its destination or to whatever use it may be put. There is a clear distinction between an obligation to spend in a particular manner attaching to an income and an obligation attaching to the source of an income. The legal effect in the two circumstances is completely different. In the former, it will be an application of income. In the latter, it is diversion. The object of the resolution passed by the members in 1959 is to decide the manner of application of the laga receipts. It can be modified or rescinded by the members at any time they like. This comes into force only when the income is received by the assessee. It does not have the effect of diverting the income before it reached the assessee. The principle of diversion of income by overriding title, therefore, has no application to the facts of the present case.
13. We may now turn to the real controversy in the case before us. The controversy is whether the amounts received by the assessee by way of laga constitute income of the assessee under section 28(i) of the Act. According to the assessee, it is not so because the principle of mutuality applies. According to the Revenue, the principle of mutuality has no application. We have considered the principle of mutuality. The cardinal requirement to apply the test of mutuality is that all the contributors to the common funds must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund. In other words, there must be a complete identity between the contributors and the participators. This court in the case of Surat District Cotton Dealers' Association : [1959]35ITR121(Bom) considered the applicability of this principle to laga receipts by an association of cotton dealers. It was observed (at page 129) :
'Now, with regard to the lagas, there can be no doubt on the facts that this is a mutual association and mutuality has been established with regard to the lagas. The test of mutuality... is that identity must be established between the persons contributing to a fund and the persons entitled to the fund. Now... it is true... that the liability to pay lagas is only upon the sellers, although... as far as the fund of the association is concerned, it belongs to all the members and all the members have the right to participate in it... Now... it is not necessary for the purpose of this identity that there must be an actual contribution by all the members. It is sufficient if all the members have a right to make a contribution. From that point of view, it is clear that every member of the association may be a seller and can be a seller, and if he is a seller he is bound to contribute to the fund. Therefore, it would not be true to say that the right to participate in the fund by paying lagas is restricted to any section of the association.'
14. In the earlier decision of this court in East India Chamber of Commerce Ltd. : [1957]31ITR791(Bom) also, there was no dispute in regard to the tests applicable in such cases. Laga receipts in that case were held to be business income of the chamber in view of the facts of the case, which were entirely different. It was found in that case (at page 802) :
'There is no subsisting right or subsisting obligation upon every member of this Chamber to pay the laga. The obligation is only upon a certain class of members. With regard to the others, the obligation to contribute to his found would only arise provided they entered into a transaction on behalf of a non-member. Therefore, they had to do something and some condition had to be satisfied before they could become eligible to be contributors to this fund. Therefore, at no time could it be said that all the members of this fund or to be contributors to this fund. With regard to some there was a provided a particular condition was satisfied. Let us look at it from another point of view. It is true that the facilities afforded by this Chamber with regard to maintaining a ring, making arrangements for delivery orders, etc., were open to all the members, but as far as the payment for these facilities was concerned, it was only restricted to a section of the members. The other members, although they availed themselves of the facilities, had no obligation to contribute to this fund.'
15. It was in such circumstances that it was held by this court (at page 802) :
'Therefore, whichever way one looks at it, it is clear that the first essential of mutuality is lacking in this case. Before we come to be question of participation in the fund, there must be contribution by all the members to the fund in the sense in which we have just indicated, viz., that there must be either an actual contribution or it should be open to every member to make a contribution if he so intended and he could carry out his intention without satisfying any condition or removing any impediment. Therefore, we are of the opinion that the contention put forward by the assessee that the contributions received by its members and which formed part of the laga fund could not be brought to tax on the ground that the principle of mutuality came into play, cannot be accepted. In our opinion, it is a business income of the Chamber under section 10(1) and to that extent we agree with the view of the Tribunal.'
16. It is thus clear that there is no conflict between the two decisions of this court referred to above. In the case of Surat District Cotton Dealers' Association : [1959]35ITR121(Bom) , the court held the laga receipts to be income as it found that all the members were not contributors to the fund. It was on the basis of that finding that the conclusion regarding non-applicability of the principle of mutuality and assessability of the laga receipts as income was arrived at by this court. In the latter decision, on a perusal of the facts this court found that there was identity between contributors and participators. It, therefore, held to the contrary. So far as the legal principles are concerned, we do not find and conflict between the two decisions.
17. It may be expedient in this connection to refer to the decision of the Supreme Court in CIT v. Kumbakonam Mutual Benefit Fund Ltd. : [1964]53ITR241(SC) . In this case, the court quoted with approval the cardinal requirement of the principle of mutuality, as stated by Lord McMillan in Municipal Mutual Insurance Ltd. v. Hills [1932] 16 TC 430, that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. As, in the above case, on the facts in was found that the shareholder in the assessee-company was entitled to participate in the profits without contributing to the funds of the company, the Supreme Court held that the test of mutuality was not satisfied.
18. Reference may also be made to the decision of the Andhra Pradesh High Court in CIT v. Merchant Navy Club : [1974]96ITR261(AP) , where a similar question came up for consideration. In considering when the identity between contributors and the participators can be said to be established, the court said (at page 273) :
'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. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve with the club for its development and for providing better amenities to its members.'
19. We may now examine the facts of the present case in the light of the principles set out above. In the instant case, it appears that bye-law No. 331(1) does not restrict the payment of laga to a particular category of members only. This is clear from bye-law No. 331(a). Clause (f) deals with the right of the members to decide the utilization of the receipts by way of laga by the assessee. The said bye-law being relevant for the determination of the controversy in the present case is set out below :
'331(a) Every member shall pay to the Exchange LAGA or CESS -
(i) On every hedge transaction of purchase and sale of all oilseeds of his constituent (whether a member of the Exchange or not) at the rate of 5 paise per every transaction of purchase and per every transaction of sale of 10 metric tonnes and every hedge transaction of purchase or sale of groundnut oil at the rate of 20 paise per 20 metric tonnes and every hedge transaction of purchase or sale of groundnut cake at the rate of 5 paise per 10 metric tonnes.
(ii) On every transaction (other than hedge) of purchase or sale of all oilseeds at the following rates per every transaction of purchase and per every transaction of sale.
(a) 50 paise per 25 metric tonnes.
(b) If less than 25 metric tonnes at 9 paise per very 50 bags or part thereof...
(f) The Board will, subject to the approval of the general meeting, decided the manner and method of distribution and/or utilization and/or apportionment and/or proportion of distribution of the moneys recovered as laga or cess under these bye-laws and under other bye-laws and/or contract terms or forms...'
20. It appears that in the instant case, the Tribunal, on a consideration of the various submissions of the assessee, recorded a definite finding of fact that all the members of the assessee in fact contributed to the laga fund. That being so, it cannot be said that all the members were not contributors. So far as participators are concerned, the undisputed position is that all the members of the exchange are participators. Under the circumstances, evidently there is a clear identity between the two - the contributors and the participators. On the face of this finding of the Tribunal, it is difficult to hold that there was no identity and that the principle of mutuality did not apply. Moreover, whether all the members were contributors or not is evidently a question of fact which has to be decided in each case by the authorities concerned. In the instant case, there is a clear finding of the Tribunal to that effect which has not been challenged. In that view of the matter, it is not necessary to decide the question whether all the members had the right to contribute or not because that will be purely academic.
21. In view of the foregoing discussion, we are of the opinion that the Tribunal was right in holding that the test of mutuality was satisfied with regard to laga receipts in the case of the assessee for the years under consideration and that in that view of the matter the said receipts did not constitute income of the assessee assessable to tax.
22. In the result, we answer the first question referred to us in the negative, that is in favour of the Revenue and against the assessee. We also answer the second and third question in the negative but in favour of the assessee and against the Revenue.
23. Under the facts and circumstances of the case, we make no order as to costs.