1. This appeal by the assessee is for the assessment year 2000-01.
Through the assessee has urged as many as 8 grounds, in effect it is directed against the order of the Commissioner of Income-tax (Appeals) in holding that the assessee-association does not possess the character of mutual concern.
2. The assessee, a private bus operators association, furnished its return for the year under consideration on 31.10.2001 declaring an income of Rs. 3,48,560/- and claimed exemption on the principles of mutuality. The case was selected for scrutiny.
3. The assessee is doing business in spare parts, accessories and oil etc. and maintains books of accounts and daily collection from the members. The assessee has a turnover of Rs. 77,50,785/-. The net income declared was Rs. 3,36,182/- and claimed exemption on the principles of mutuality. Reliance was placed on the decision of the Apex Court in the case of CIT v. Sai Publication Fund reported in 258 ITR 70. This case was distinguished by the Assessing Officer on facts. The Assessing Officer held that Sai Publication Fund was a religious trust.
publishing books and pamphlets for spreading the religious messages sold to general public whereas in the instant case of the assessee, the goods are brought from outside and not manufactured by the assessee.
The Assessing Officer held that the object of the assessee association, more specifically, making available spare parts to its members which can be considered as a specific services covered by Section 28(iii) of the Act. It was also the case of the assessee that the principles of mutuality will apply in the case of the assessee, hence, the income is not taxable. Reliance was placed on the decision of the Supreme Court in the case of CIT v. Bankipur Club Ltd. (226 ITR 97) (SC). This decision was also distinguished by the Assessing Officer. The Assessing Officer held that in the case of the assessee, the income is not generated from the activities between the contributors and participants alone. Apart from the members who buy the spare parts, there is a third party, i.e. being the suppliers of the spare parts. The decision rendered by the Hon'ble Apex Court cited in the matter of sales-tax reported in 258 ITR 70, he held, does not fit into the circumstances of the case. Aggrieved, the assessee approached the first appellate authority.
4. Before the Commissioner of Income-tax (Appeals), it was contended that no specific services such as contemplated under Section 28(iii) has been rendered to its members by the association. The dealings in goods cannot be regarded as a specific service. The assessee relied on the decision of the Hon'ble Punjab & Haryana High Court in the case of Northern India Pictures Association reported in 180 ITR 160.
5. The Commissioner of Income-tax (Appeals) held that the association has not provided any specific services to its members. What the assessee actually has done is selling the quality products to its members at a low cost. The Memorandum of Association of the assessee aims to maintain unity and cordiality between the bus owners and also the assessee is providing services to its members such as imparting technical knowledge, fruitful suggestion to do business, establishing libraries, symposium, workshop etc. These are of general nature and not specific service. He further held that the assessee association in fact is not equipped with, to provide specific services as mentioned above.
There is no material to hold that the association has performed any specific services. Hence, he upheld the findings of the Assessing Officer.
6. Analysing the principles of mutuality, the Commissioner of Income-tax (Appeals) held that there is no material, no substance in the claim of the assessee. The dealings of the association with its members are - a) The assessee association is purchasing automobile spare parts, tyres, etc. from third parties and selling to its members exclusively claiming to have sold quality products at a lesser cost; c) Profit earned are accumulated and used for providing services to its members; and d) Over all objects of the association is to promote the interest of bus owners of Palghat District.
The CIT(Appeals) held that selling of quality products at low cost to its members exclusively is nothing special, attributable vis-a-vis with mutuality. This is nothing but a commercial tactics or strategies to sell quality products to its members. The claim of the assessee that there is complete identity between the contributors and participants are also not clearly visible. A third party i.e. suppliers of spare parts are also involved in the trading activities of the association.
Therefore, it is not exclusively arising from the dealing between the members. Therefore, he held that the cardinal principle of mutuality, that a man cannot make profit by trading himself does not apply in the instant case of the assessee. There is no contribution to a common fund in pursuance of some specific scheme by its members, for the mutual benefit. In the instant case of the assessee the facts are totally different from the decided cases altogether, assessee is doing business in the garb of mutuality. It is tainted with commercial activities. The assessee earns profit, a little less than the normal comparable commercial business concerns working in this field. The assessee organization is earning interest income on deposits of which they themselves paid tax. The commerciality, cannot be concealed under cover of mutuality; and mutuality cannot survive under the atmosphere of commerciality. He relied on the decision of the Hon'ble Apex Court in the case of CIT v. Bankipur Club (226 ITR 97) for the above conclusion.
7. The CIT(Appeals) further held if the veil of mutuality is lifted which is artificially created, it is not difficult to understand that the so called "mutual association" formed by the assessee is nothing but an association of persons doing business for their own interest.
The entire documentation and paper work has been arranged in such a way to appear the objective, giving shade of mutuality to the association, so that it may be exempted from tax. The activities are done by the assessee to generate income. He held that if this type of mutuality is allowed to run like a business organization, it may open floodgates of tax evasion, and defrauding the Revenue its due. By adopting this ingenious method, genuine tax liability will be eroded. He held that the decision reported in Bankipur Club Ltd. altogether is distinguishable from the case of the assessee. In that case, it was a club, and the Apex Court found that activities undertaken by the club, by and large partakes the nature of "usual privileges, advantage, convenience and accommodation" extended to its members or the guests of members. It has no character of income. There was no motive in the dealings, and in the services rendered by the club, the motives were not tainted with commerciality. The activities of the club has, in strict sense, no commercial approach. The club itself has taken the birth from the motive of service. They are not outrightly involved in trading with third parties. If they do business with third parties with business mind and profit motive, then, principles of mutuality definitely does not apply. The reliance was placed by the CIT(Appeals) for the above observation in the decision of the Privy Council in the case of English & Scottish Joint Co-op. Wholesale Society v. CAG IT (16 ITR 270). Thus, the CIT(Appeals) dismissed the appeal of the assessee.
Aggrieved, the assessee is in second appeal before the Tribunal.
8. The case of the assessee is that the assessee is a mutual association of bus owners, formed with the object of "Organising Private Bus Transport Industry" in Palghat District, on scientific basis and to bring about and strengthen harmony, union and friendly assistance and help among bus owners of the District "without desire or motive for profit". Keeping in mind the above objects the assessee deals in automobile spare parts, tyres, etc. to ensure that members of mutual association get good quality material at low cost. The assessee, thus, makes surplus which the assessee claims as exempt on the principles of mutuality. The claim of mutuality .. was rejected by the Assessing Officer as well as the CIT(Appeals). According to the assessee, no non-members are eligible to procure any items of spare parts from the shop run by the association. There is no particular service to any particular member. It is a general service made available to all the members of the Association No commercial dealings in fact. By doing trade among themselves, one cannot earn any profit.
The association is acting as an agent for its members in the matter of procuring spare parts etc. and supplying the same to its members, no sale would be involved as the element of "transfer" would be completely absent. The assessee relies on the decision of the Apex Court in the case of CIT v. Bankipur Club Ltd. (supra). The principle is that the members have a right to participate in the whole, there is no trading among the members. There cannot be trade with themselves. The assessee also relies on the decision of the Apex Court in the case of Chelmsford Club v. CIT (243 ITR 89) for the proposition that Income-tax Act recognises the principle of mutuality and excludes all business involving such principle from the purview of the Act, except those mentioned in Clause (vii) of Section 2(24). Since the assessee is not carrying on any business as defined in Section 2(13) of the Income-tax Act, 1961, there is no business carried on by the assessee and there is no taxable income in the instant case of the assessee. The assessee also relies on the decision of the Calcutta High Court in the case of CIT v. Darjeeling Club Ltd. (153 ITR 676). The assessee's representative further submitted that for some reason or other, if the assessee association ceases to exist/comes to an end, then the surplus or the amount accumulated is either to be handed over to the Government or to somebody, formed with similar objects. Hence, he submitted that the orders of the Revenue authorities are liable to be set aside.
9. The ld. departmental representative supported the orders of the Revenue authorities.
10. Considering the rival submissions and the decisions relied on, I am of the view that the orders of the Revenue authorities are liable to be reversed. The aims and objects enshrined in the Articles of Association are as follows. The first object is to work without profit motive, organizing the Transport industry for the benefit of its members, on scientific basis and, to work for the progress and amelioiration of the plight of the bus owners. And also to bring about unity and cordiality among the Bus Owners of the District, modernizing and developing the transport industry in the District for the benefit of its members, to give directions to the industry to get rid of economic exploitation, to establish libraries, symposium, workshops and conducting study classes to impart technical know-how/knowledge to its members are its aims and objects among many others.
11. In the decision reported in Sai Publication Fund (258 ITR 70) cited supra on facts is distinguishable from the instant case of the assessee. The Hon'ble Apex Court held that the society cannot be treated as a dealer. It was not liable to sales tax on sales of books, pamphlet etc. Their Lordships further held that the profit motive arises only if the person is carrying on activity in the nature of trade. Analysing Section 2(5A) of the Bombay Sales-tax Act, 1959, the Hon'ble Apex Court held that "if the main activity is not business, then any transaction incidental or ancillary would not normally amount to "business", unless an independent intention to carry on "business" incidental and ancillary is established. Their Lordships further held "in such cases, the onus of proof of an independent intention to carry on 'business' in the incidental or ancillary activity of sales rests on the department".
12. In the principles of mutuality, the dominant intention is not business. Is it possible to say the same about he assessee association? It is true that they are collecting membership fee and getting high quality materials i.e. spare parts, tyres, etc. for its members and supply it to members at a cheaper price. The profit or surplus may be intended to be used for educating the members. The case law relied upon by the assessee in the case of CIT V. Bankipur Club Ltd. (supra) went in favour of the assessee for the reason stated in page 109 and 110 of the order of the Apex Court. The relevant portion is reproduced below :- "Now, we turn to the main question canvassed by the Revenue in the appeals coming under Groups A to D, namely, whether the assessees - mutual clubs, are entitled to exemption for the receipts or surplus arising from the sales of drinks, refreshments etc., or amounts received by way of rent for letting out the buildings or amounts received by way of admission fees, periodical subscriptions and receipts of similar nature, from its members IN all these cases, the Appellate Tribunal as also the High Court have found that the amounts received by the clubs were for supply of drinks, refreshments or other goods as also the letting out of building for rent or the -amounts received by way of admission fees, periodical subscription etc., from the members of the clubs were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective clubs. It has also been found that different clubs realised various sums on the above counts only to afford to their members the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done with any profit motive, and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any, availing of the facilities occasionally)." A reading of the above makes it clear that Their Lordships came to the above conclusion, particularly in view of the fact that the services offered by the club was not out of any profit motive or were not tainted with commerciality.
13. In the case of Sai Publication Fund (258 ITR 70) there was no profit motive. The dominant intention was to spread the message of Saibaba. Even if profit is earned, the dominant intention was not profit. So also the facts in the case of CIT v. Darjeeling Club Ltd. (153 ITR 676).
14. Justice Shri Paranjali Sastri, in his inimitable style in the case of CIT v. Royal Western India Turf Club (1953) 24 ITR 551, explains the principles of mutuality. It reads as under :- "The principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing per se to prevent a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does not come back to them as persons who had contributed them.
Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves, But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members." 15. In the case of a club, it is providing certain facilities to its members. The assessee provides guidance to its members and provide facilities, ultimately used by the members in their individual capacity to operate the buses in a more profitable way. But that does not mean that assessee is doing commercial activity by itself.
16. Their Lordships of the Supreme Court in Bankipur Club Ltd. (supra) at page 102 of the report cited the law dealing with "Mutual trading operations" (British Tax Encyclopedia (I) 1962) as under :- "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 surplus 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 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 ...." "it should be noticed that in the case of a "mutual society or concern" (including a "member's club"), there must be complete identity between the class of contributors and the class of participators. The particular label or form by which the mutual association is known, is of no consequence. The said principle which has been laid down in the leading decisions and emphasised in the leading English text books mentioned above, has been explained with reference to Indian decisions in "The Law and Practice of Income-tax" (Eighth edition, Volume I, 1990) by Kanga and Palkhivala at page 113, thus: "... 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 Madras, Andhra Pradesh and the 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. ..." The crucial issue that arises for consideration in cases where it is claimed that on the basis of principle of mutuality, the receipts by the "society" or "club" are exempt from taxation, has been succinctly stated by the Judicial Committee of the Privy Council in Fletcher v. Income-tax Commissioner (1971) 3 All ER 1185, at page 1189, thus : "... is the activity, on the one hand, a trade, or an adventure in the nature of trade, producing a profit, or is it, on the other, a mutual arrangement which, at most, gives rise to a surplus ?" In substance, the arrangement or relationship between the club and its members should be of a non-trading character." 17. In the case of Bankipur Cub Ltd. the Hon'ble Apex Court also held that the receipts for various facilities extended by the club to its members, is a part of privilege, advantage and convenience attached to its members. There was no trading activity. It is difficult to hold otherwise in the case of the assessee also. Non-members have no right to participate - purchase - the goods from the association. So in effect this is mutuality. The case of the Revenue is that other than the members - bus owners of the district and the association, a third party had dealings with the Association, from whom the association purchases goods. So, according to the Revenue, there is no complete identity between the contributors and the participators.
18. I am afraid the Revenue authorities missed the point. In the case of club members, the Supreme Court held there cannot be profit from the activity, since only members are dealing with. It is the case with the assessee also. Only the members of the association can participate in the activity - of purchase. The profit earned is not distributed among the members. If the association comes to an end, the profit is taken over by the Government or a body with similar objects. If the purchase of spare parts etc. is held to be a dealing with third party, then, clubs also deal with third party. The purchase done by the club from beverage companies and purchase of raw materials for preparation of food is also a dealing with third party. The Apex Court held this does not violate the principle of mutuality and complete identity between its members. Ultimately the formation of association may be a device, but that device falls below the demarcation tainted commerciality and device to defraud the Revenue. Every tax saving device is not illegal.
Legally permitted planning cannot be held illegal by attributing motives. Every tax payer has a motive to reduce his tax liability. It should not go beyond genuine tax planning. If the liability is brought to minimum by adopting one device, it cannot be held illegal only because if the assessee has not adopted that device he would have been liable to pay higher tax.