U.V. Bakre, J.
This common judgment and order shall dispose of the above three appeals filed against the orders, of the Income Tax Appellate Tribunal, Panaji Branch (I.T.A.T.), dated 6/9/2006 in I.T.A. No. 214 to 217/PANJ/2005; 2/1/2006 in I.T.A. No. 29/PANJ/1998; and 9/7/2007 in I.T.A. No. 92/PNJ/2007, thereby holding that the principle of mutuality applies and that the income earned from members is liable to be exempted from tax.
2. The respondent is the assessee, which is a Co-operative Society registered under the Co-operative Societies Act, engaged in trading in consumer goods to its members as well as non-members.
3. Facts relevant for the disposal of the Tax Appeal no. 13 of 2007 may be stated as under:
The assessment years relevant for the purpose of this appeal are 1997-1998, 1998-1999, 1999-2000 and 2000-2001. For the assessment year 1997-1998, the assessee had filed return of income on 15/10/1997 which was processed under Section 143(1) of the Income Tax Act, 1961( I.T. Act, for short) and proposal under Section 151(2) of I.T. Act 1961 was sent by the Assessing officer to the office of J.C.I.T., Range- 2, Panaji for approval to issue notice under Section 148 of the I.T. Act. Accordingly, notice under the said provision was issued on 15/07/2003, in response to which the assessee filed the return of income on 21/10/2003 in which the assessee claimed the deduction of Rs. 2,25,963/-, under section 80P(2A)(d) of the I.T. Act, on account of sale of consumable goods to its members. The assessment was completed by the Assessing Officer and by order dated 30/11/2004 the said claim of assessee came to be rejected. For the assessment year 1998-1999, the assessee had filed the return of income on 28/10/1998 which return was processed under Section 143(1) of the I.T. Act on 23/03/1999 and notice under Section 148 of the I.T. Act was issued on 15/07/2003, in response to which the assessee filed return of income on 26/10/2003. The assessee claimed exemption in respect of the income amounting to Rs. 6,24,952/- under Section 80P(2A)(d), on the ground that this income is derived from the sale of consumable goods to its members. The assessment was completed by the Assessing Officer and by order dated 30/11/2004, the said claim in respect of Rs. 6,24,952/- made under Section 80P(2A)(d) was rejected. For the assessment year 1999-2000, the assessee filed return of income on 25/08/1999 which was processed under Section 143(1) of the I.T. Act on 01/12/2001 and notice under Section 148 of the I.T. Act was issued on 15/07/2003, in response to which the assessee filed return of income on 21/10/2003, in which the assessee claimed exemption in respect of Rs. 1,71,633/- under Section 80P(2A)(d) of the I.T. Act. The assessment was completed by the Assessing Officer and by order dated 30/11/2004 he rejected the said claim in respect of Rs. 1,71,633/- made by the assessee. For the assessment year 2000-2001, the assessee filed return of income on 19/10/2000 which was processed under Section 143(3) and notice under Section 148 of the I.T. Act was issued on 25/06/2003 in response to which the assessee filed return of income on 09/07/2003 in which the assessee claimed exemption in respect of Rs. 3,76,382/- under Section 80P(2A)(d) of the I.T. Act on the ground that this income was derived from the sale of goods to its members. The assessment was completed by the Assessing Officer and by order dated 30/11/2004, the said claim of exemption in respect of Rs. 3,76,382/- was rejected. Being aggrieved by the above orders of the Assessing Officer, the assessee filed four appeals before the Commissioner of I.T. (Appeals), hereinafter referred to as CIT(A). C.I.T.(A) by separate orders dated 23/09/2004, dismissed the appeals, holding that the general concept of mutuality will not apply in the case of consumer co-operative society doing business and earning profit and such co-operative societies are more like companies where the members own shares and are entitled to dividends. Aggrieved by the orders of the C.I.T.(A), the assessee filed four appeals before the I.T.A.T. and the I.T.A.T. by joint order dated 06/09/2006, allowed all four appeals filed by the assessee, thereby reversing the findings of the Assessing Officer and C.I.T.(A), on the ground that the principle of mutuality does apply and the income earned from members is liable to be exempted from tax. The Tax Appeal no. 13 of 2007 has been filed under Section 260-A of the I.T. Act against the said order dated 06/09/2006 passed by the I.T.A.T.
4. Facts in Tax Appeal No. 18 of 2007 may be stated as under: the assessee filed return of income for the assessment year 1994-1995 claiming that out of the total sales, 46.94% of the sales to the members amounting to Rs. 3,87,876/- is liable to be exempted under the concept of mutuality. The Assessing Officer completed the assessment by order dated 27/03/1997, by disallowing the said claim of exemption holding that there is no concept for mutuality as the assessee trades with public by making profit. The appeal filed by the assessee before the C.I.T. (A), was dismissed by order dated 23/01/1998 by C.I.T.(A), holding that the general concept of mutuality will not apply in the case of Consumer Co-operative Society which is earning profit. In an appeal filed by the assessee before the I.T.A.T., by order dated 02/01/2006, the I.T.A.T. allowed the said appeal holding that the principles of mutuality does apply and the income earned from members is liable to be exempted from tax. Aggrieved by the above order dated 02/01/2006 of the I.T.A.T., the appeal no. 18 of 2007 has been filed under Section 260-A of the I.T. Act.
5. The relevant facts in Tax Appeal No. 36 of 208 are as follows: for the assessment year 2004-2005, the assessee had filed return of income on 05/10/2004 which return was processed under Section 143(1) of I.T. Act on 18/01/2005. During the proceedings, the assessee claimed exemption on the net profit from business income of Rs. 13,17,738/-, under the concept of mutuality. The assessment was completed by the Assessing Officer and by order dated 20/12/2006, the Assessing Officer rejected the exemption claim made by the assessee on the concept of mutuality which was to the extent of Rs. 85,584/-. Aggrieved by the order of Assessing Officer, the assessee filed appeal before the C.I.T. (A) and C.I.T. by order dated 23/03/2007 dismissed the appeal, holding that there is no justification to make the dis-allowance of expenses made in the assessment. Aggrieved by the order of the C.I.T.(A), the Revenue filed appeal before the I.T.A.T. and the I.T.A.T. by impugned order dated 09/07/2007 dismissed the appeal filed by the Revenue, on the ground that the principle of mutuality applies and the income earned from the members is to be exempted from tax. Against the said order, the Revenue has filed the Tax Appeal no. 36 of 2008.
6. All the three appeals have been admitted on the following common substantial questions of law namely:
A) Whether on the facts and in the circumstances of the case, the ITAT was justified in law in holding that income earned by the assessee from its members is exempted by applying principle of mutuality, without considering that the assessee society is trading with members and non-members alike, selling consumers goods to all?
B) Whether on the facts and in the circumstances of the case, the finding of the ITAT that the assessee society is eligible to exemption on the principle of mutuality, is without any finding that the facility provided to members is a matter of convenience and therefore valid in law, particularly, in the light of the law laid down by the Hon'ble Supreme Court in CIT v/s. Bankipur Club Ltd., reported in "226 ITR 97"?
7. Heard Ms. Asha Dessai, learned counsel for the appellant. None is present on behalf of the respondent though duly served.
8. The learned counsel for the appellant has pointed out that there is no Section 80P(2A)(d) in existence in the I. T. Act. According to her, section 44A of the I.T Act deals with the concept of mutuality and that the same is not applicable to Co-Operative societies. She submitted it is Section 80P of the I.T. Act, which is applicable to the Co-Operative Societies. She submitted that the concept of mutuality is for benefit of non-profit making societies and if there is element of profit making, involving non-members, then mutuality cannot apply. She read out Section 80P(2)(c) and stated that this provision does not at all speak about mutuality. Relying upon “Sind Coop. Hsg. Society Versus Income Tax Officer” [(2009) 3 TaxCorp (DT) 43705 (BOMBAY)], the learned counsel for the appellant argued that the tests regarding the concept of mutuality laid down by this Court, in that case have not been satisfied in the present case. According to her, the sales to members and non-members could not have been separated since contribution by each is different. She has relied upon the case of “Commissioner of Income Tax, Bombay City versus Royal Western India Turf Club Limited” (CDJ 1953 SC 025) and “Commissioner of Income Tax versus M/s. Bankipur Club Ltd.” [CDJ 1997 SC 1233] and has contended that the present case is fairly covered by these citations. She argued that amount received from members and non-members out of the sale to members as well as to non-members goes to the society, which is then distributed as dividend. According to her, the Judgment of Gujarat High Court in “Sports Club of Gujarat Ltd., Vs Commissioner of Income-Tax” [(1988) 171 ITR(Guj)], is against the Judgment of the Apex Court in “Bankipur Club Ltd.” (supra) and therefore could not have been relied upon by the I.T.A.T. She therefore contended that the I.T.A.T. was not justified in law in holding that the income earned by the assessee from its members is exempted on the ground of principles of mutuality.
9. We have gone through the material on record in the light of the arguments advanced by the learned counsel for the appellant and citations relied upon by her.
10. As has been rightly contended by the learned counsel for the appellant, there is no Section 80P(2A)(d) in the I.T. Act. The doctrine of mutuality is contained section 44(A) of the I.T. Act which reads as follows:-
Section 44A. SPECIAL PROVISIONS FOR DEDUCTION IN THE CASE OF TRADE, PROFESSIONAL OR SIMILAR ASSOCIATION.
(1) Notwithstanding anything to the contrary contained in this Act, where the amount received during a previous year by any trade, professional or similar association (other than an association or institution referred to in clause (23A) of section 10) from its members, whether by way of subscription or otherwise (not being remuneration received for rendering any specific service to such members) falls short of the expenditure incurred by such association during that previous year (not being expenditure deductible in computing the income under any other provision of this Act and not being in the nature of capital expenditure) solely for the purposes of protection or advancement of the common interests of its members, the amount so fallen short (hereinafter referred to as deficiency) shall, subject to the provisions of this section, be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under the head "Profits and gains of business or profession" and if there is no income assessable under that head or the deficiency allowable exceeds such income, the whole or the balance of the deficiency, as the case may be, shall be allowed as a deduction in computing the income of the association assessable for the relevant assessment year under any other head.
(2) In computing the income of the association for the relevant assessment year under sub-section (1), effect shall first be given to any other provision of this Act under which any allowance or loss in respect of any earlier assessment year is carried forward and set off against the income for the relevant assessment year.
(3) The amount of deficiency to be allowed as a deduction under this section shall in no case exceed one-half of the total income of the association as computed before making any allowance under this section.
(4) This section applies only to that trade, professional or similar association the income of which or any part thereof is not distributed to its members except as grants to any association or institution affiliated to it.
11. From the above provision of section 44A of the I.T. Act, it appears that the doctrine of mutuality applies only to the trade, professional or similar associations, which are not profit making bodies and which derive income by way of subscription. Even, in case of such associations, however, remuneration received for rendering any specific service to members, is not exempted. A consumer co-operative society, which sells commodities of daily use to members and non-members at the same price and makes profits out of such business, cannot be brought under section 44A of the I.T. Act. Such associations would be covered under section 80P of the I.T. Act for exemption of income. However, such income must be derived from purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members. The respondent is not engaged in the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture and supply of the same to its members. In the present case, the respondent-society is making profit by involving non-members. There is interest earned from members as well as non-members by sale of consumable goods to them. The amount earned goes to the respondent-society, which is distributed as dividend amongst the members. Hence, section 44A of the I.T. Act is not applicable to the present case. Section 80P(2)(c)(i) of the I.T. Act applies where co-operative society is a consumer's co-operative society and when it fulfills the criteria mentioned in section 80P of the I.T. Act.
12. In the case of “M/s. Bankipur Club Ltd.” (Supra), the principles of mutuality have been thoroughly discussed. The question was whether the assessee – mutual clubs were entitled to exemption for the receipts or surplus arising from the sale of drinks, refreshments etc. or amount 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. The Hon'ble Supreme Court, relying upon various decisions, has observed that these decisions lay down the broad proposition that if the object of the assessee – company claiming to be a “mutual concern” or “club”, is to carry on a particular business and money is realized both from the members and from non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with is commerciality. In other words, the activity carried out by the assessee in such cases, claiming to be a “mutual concern” or “ Members' club” is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike is a trade / business/ transaction and the resultant surplus is certainly profit – income liable to tax.
13. In the case of “Sind Coop. Hsg. Society”(supra), a Division Bench of this Court, relying upon “Bankipur Club Ltd.”(supra), “Royal India Turf Club Ltd.”,(supra) and various other cases, has laid down following tests for applying the principle of mutuality to a case of a cooperative housing society:
(1) Is there any commerciality involved;
(2) From the moneys received are the services offered in the nature of profit sharing or previleges, advantages and conveniences; and
(3) Are the participants and contributors identifiable and belong to the same class in the case of cooperative housing society.
(4) Do the members have the right to share in the surplus and do they have a right to deal with its surpluses.
14. The assessee had not claimed exemption on the basis of doctrine of mutuality for the assessment year 1992- 1993 and 1993-1994. The exemption was claimed on the basis of the concept of mutuality for the first time for the assessment year 1994-1995. The Assessing Officer rejected the contention of the assessee on the following basis:
(a) The assessee co-op. Society has not claimed exemption on the basis of concept of mutuality in any of the earlier years.
(b) The assessee Co-operative society is a trading concern supplying the goods to all the members of the public including its members. The assessee co-operative society is a separate entity from its members.
(c) The assessee co-op. Society is not trading with itself but with its members and public who are different distinguishable entities and the trading carried out between the assessee co-op. Society and its members cannot be claimed exempt on the basis of concept of mutuality as claimed by the assessee co-op. Society.
(d) The cases cited by the Authorised Representative of the assessee co-op. Society are totally irrelevant and are not comparable to the activities of the assessee co-op. Society.
(e) The cases cited by the undersigned in para 8 above clearly prove that the exemption claimed on the concept of mutuality by the assessee co-op. Society is not allowable.
15. The C.I.T.(A), in I.T.A. No. 45/PNJ/97-98, pertaining to the assessment year 1994-95, also, dismissed the claim of the assessee on the ground that the Co-operative Society is a separate legal entity more like company where members own shares and are entitled to dividend. The C.I.T. (A) further held that the principles of mutuality have been recognized in the Act in relation to trade, professional or similar associations which are not profit making bodies and since this society is making profit by selling goods, deduction under Section 80(P) is available to the society and therefore general concept of mutuality will not be applicable. The C.I.T. (A) held that the concept of mutuality will not be applicable to the assessee.
16. On considering the rival submissions of the parties, the learned I.T.A.T., however, held that the assessee deserves to succeed. The learned I.T.A.T. held that the income arising from members is exempted as the principle of mutuality applies. The I.T.A.T. was of the view that the claim of the assessee that its income exclusively arising from members should be exempt on the basis of concept of mutuality and the income earned on business with non-members should be taxed, is a concept covered by the decision of the Hon'ble Supreme Court in BankipurClub Ltd. (Supra). The I.T.A.T has not held that what is being offered by sale of consumable goods to the members as well as non-members are usual privileges, advantages and conveniences that would attract the principle of mutuality.
17. In our considered opinion, the learned I.T.A.T. has misconstrued the principles laid down by the Apex Court in “Bankipur Club Ltd.”, (supra). A true interpretation of the principles relating to the doctrine of mutuality laid down in the case supra and application of the tests laid down by this Court in ”Sind Coop. Hsg. Society”(supra), would certainly lead to the conclusion that the respondent-assessee is involved in commerciality and that from the moneys received from the members, services are offered to members and non-members, in the nature of profit sharing by the members and not for the purposes of any conveniences to the members. The amount which comes to the society is distributed amongst the members as dividend. The doctrine of mutuality cannot be applied to the respondent-Assessee.
18. In view of the above, the first substantial question of law is answered in the negative whereas the second one is answered in the affirmative.
19. In the result, all the above three appeals are allowed. The impugned orders of the I.T.A.T. are quashed and set aside. No order as to costs.