JUDGMENT
Ajit K. Sengupta, J.
1. In this reference under Section 256(1) of the Income-tax Act, 1961, the following question of law has been referred by the Tribunal :
“Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the assessee is a mutual concern and that consequently the income derived by the assessee as and when and by way of subscription and admission fees is not liable to be taxed under the Income-tax Act, 1961 ?”
2. This reference relates to the assessment years 1975-76, 1978-79 and 1981-82. The assessee is a trade association. The objects for which it was established as set out in Clause 3 of the articles of association are, inter alia, to promote and protect trade, commerce and industries of India and in particular the trade, commerce and industries connected with paper, to encourage friendly feeling and unanimity amongst the mills and users of steam and water and/or electric power on all subjects connected with their common good, to ameliorate the working conditions of the employees in the mills and factories, to promote good relations between the employees and the employers, to educate public opinion and disseminate correct information about the working of the industry by means of publication of literature, by taking part in exhibitions and through the press and other media and to organise, establish, start or sponsor a separate institute or Department or Departments of the association for the purpose of doing research work, sales of paper and other products of the mills and for such other purposes as are mentioned in the objects of the association. The association does not carry on business for its members or outsiders. The receipts of the association are from the following sources :
1. Admission fee receivable from its members as per Clause 17 of the articles of association.
2. Annual subscription fee receivable from its members as per Clause 18 of the articles of the association.
3. Special subscription fee or surcharge receivable from its members as per Clause 19 of the articles of association.
4. Interest on deposits with banks from securities made out of the surplus, if any, of the association’s fund in accordance with Clause 66 of the articles of association.
3. A perusal of the assessment order for the assessment year 1975-76 goes to show that for that assessment year the assessee claimed that it was a charitable institution within the meaning of Section 2(15) of the Income-tax Act, 1961, as its object was to promote trade and commerce. This contention was rejected by the Income-tax Officer and for that assessment year the entire amount representing excess of income over expenditure was subjected to tax. For the assessment year 1978-79, the assessee claimed that it was a mutual benefit society and hence its income from subscription from its members did not form part of the total income. This contention was also rejected by the Income-tax Officer. Similar claim was made for the assessment year 1981-82, but it was turned down by the Income-tax Officer. So, for all the three assessment years, the amount of subscriptions, etc., received from the members was subjected to tax by the Income-tax Officer. It may also be pointed out that the assessee has been assessed for all the three assessment years in the status of an association of persons. It has not been shown if the assessee-association has been registered under the Societies Registration Act.
4. The assessee appealed to the Commissioner of Income-tax (Appeals) for all the three years under consideration. It was contended on behalf of the assessee that it was a mutual concern. So, the subscription received by it from its members was not liable to income-tax. It was further submitted that the assessee did not carry on any business activity and that expenditure incurred for various activities undertaken by the assessee was made from the subscription received from its members. Exemption in respect of the amount received by way of subscriptions, etc., was claimed on the principle of mutuality. It was also contended that the amount received by the assessee from its members by way of subscription was spent for their benefit. The Commissioner of Income-tax (Appeals) considered Clause 73 of the articles of association of the assessee which runs as follows :
“73. The association shall not be dissolved except by the decision of a majority of three-fourths of the members assembled at a general meeting specially convened for the purpose. The quorum for this meeting shall be three-fourths of the total number of members on the register of members at the time. This meeting shall also decide in what manner the funds of the association, after dissolution, if any, shall be disposed of.”
5. The Commissioner of Income-tax (Appeals) relying upon the decision of the Gujarat High Court in the case of CIT v. Shree Jari Merchants’ Association [1977] 106 ITR 542, held that the assessee is not a mutual association and that income from subscriptions and admission fee is liable to tax.
6. Being aggrieved, the assessee took the matter to the Tribunal. The Tribunal relying upon the decisions in CIT v. Madras Race Club CIT v. West Godavari District Rice Millers Association and in CIT v. Cochin Oil Merchants Association [1987] 168 ITR 240 (Ker), upheld the contention of the assessee that it is a mutual association and the income from subscription and admission fees is not liable to tax.
7. At the hearing before us, the contentions as urged before the Tribunal have been reiterated. The only question which calls for determination is whether Clause 73 of the articles of association which gives a discretion to the members in the matter of disposal of surplus funds on the dissolution of the association did in any way destroy the principle of mutuality in this case.
8. In CIT v. Shree Jari Merchants Association [1977] 106 ITR 542, the Gujarat High Court held that a mutual association is an association of persons, who agree to contribute funds for some common purpose mutually beneficial and receive back the surplus left out of those funds in the same capacity in which they make the contributions. The members receive back what was already their own. They contribute not with an idea to trade, but with an idea of rendering mutual help. The receipt which comes back in their hands is not a profit because no person can make a profit out of himself. Thus, the main test of mutuality is complete identity of the contributors with the recipients. According to Rule 38 of the constitution of Shri Jari Merchants’ Association, the surplus assets of the assessee shall, at the time of its dissolution, be used in the manner proposed in the resolution passed by the association. Apparently, any resolution which might come up for consideration in future would not necessarily provide for the distribution of the surplus assets only amongst the members of
the association. In case the assets of the association are not liable to be returned to the members, the learned judges of the Gujarat High Court observed that the identity between the contributors and the recipients would be lost. This would militate against the very basic principle of mutuality. The court, therefore, held that the assessee was not a mutual concern and could not claim exemption from tax on that ground.
9. The aforesaid decision of the Gujarat High Court in Shree Jari Merchants Association [1977] 106 ITR 542 was considered by the Andhra Pradesh High Court in West Godavari District Rice Millers Association [1984] 150 ITR 394, where Clause 21 of the memorandum of association was considered by the Andhra Pradesh High Court. Clause 21 says that the surplus fund should not go to the members and it should be made over to the association with similar objects by a decision of three-fifths majority of the association. There the Andhra Pradesh High Court held that a mutual association is an association of persons, who agree to contribute funds for some common purpose mutually beneficial and receive back the surplus left out in the same capacity in which they have made the contributions. Therefore, the capacity as contributors and participants remains the same. The participation envisaged in the principle of mutuality is not that the members should take the surplus to themselves, It is enough if they have a right of disposal over the surplus. The learned judges of the Andhra Pradesh High Court specifically dissented from the decision of the Gujarat High Court in Shree Jari Merchants’ Association [1977] 106 ITR 542.
10. The Andhra Pradesh High Court, thus, was of the view that the doctrine of mutuality applies even where a clause like Clause 21 is incorporated in the memorandum of association. It does not militate against the application of this doctrine.
11. The Madras High Court in Madras Race Club’s case [1976] 105 ITR 433 held as follows (at page 443) :
“It is well-settled that the memorandum and articles of a company represent the contract between the company and the members. It is only by virtue of their ownership of the surplus assets, if any, that the members had agreed to the clause that they would not take back the surplus, but allow it to be transferred to any similar entity. As they themselves are to deal with the surplus, if any, at the time of winding up, it cannot be said that they are not participators in the surplus. The clause is only a fetter in the manner of disposal. The participation envisaged in the principle of mutuality is not that the members should willy nilly take the
surplus to themselves. It is enough if they had a right of disposal over the surplus to show that they were the participators.”
12. The Kerala High Court in Cochin Oil Merchants Association’s case [1987] 168 ITR 240 quoted with approval the aforesaid passage from the judgment in Madras Race Club’s case . In Cochin Oil Merchants Association’s case [1987] 168 ITR 240 (Ker), the Income-tax Officer had rejected the claim of mutuality on the ground that there was a provision in the memorandum of association that on winding up or dissolution, the surplus left over was to be transferred to some other institution having objects similar to the objects of the association or to a charitable body or bodies to be determined by the members at or before the time of dissolution and not to be distributed among the members of the association.
13. The Kerala High Court also held that this provision did not militate against the assessee’s claim of mutuality. The provision in the memorandum of association regarding dissolution showed that the members had a right of disposal over the surplus and the provision did not nullify the principle of mutuality. The assessee-association was, therefore, held to be a mutual association and the subscriptions received by the assessee from its members were held to be not includible as income chargeable to tax in the hands of the association.
14. In CIT v. Northern India Motion Pictures’ Association [1989] 180 ITR 160, the Punjab and Haryana High Court considered Clause 7 of the memorandum of association of that assessee which provided that upon winding up or dissolution of the association, the remaining property, after the satisfaction of its debts and liabilities, shall not be paid or distributed amongst the members but shall be given or transferred to such other institution or institutions having similar objects, to be determined by the members at or before the time of dissolution, or in default thereof, by the Prime Minister of the East Punjab and if this cannot be done, then to some charitable object. The Punjab and Haryana High Court held that the contributors, by incorporating Clause 7, did not deprive themselves of their control on the disposal of the surplus. The Punjab and Haryana High Court preferred the view taken by the High Courts of Madras, Andhra Pradesh and Kerala in the cases mentioned above and specifically dissented from the view taken by the Gujarat High Court.
15. Clause 73 of the articles of association of the assessee which we have already set out no doubt gives discretion to the members for disposal of
the assets in the event of the dissolution of the association. The Gujarat High Court in Shree Jari Merchants’ Association [1977] 106 ITR 542 considered a similar clause, being Clause 38 of the constitution of the said association which contemplated that at the time of dissolution of the association, its assets should be used or utilised as decided in the resolution for dissolution. The view of the Gujarat High Court was that the only obstacle which prevented the assessee from taking the character of mutuality is Rule 38. According to the Gujarat High Court, if the assets of the association are not liable to be returned to the members, the identity between the contributors and the recipients would be lost. This would militate against the basic principle of mutuality.
16. On the other hand, before the Andhra Pradesh, Kerala and Madras High Courts, a similar clause like Clause 73 after its amendment was considered and these High Courts have dissented from the view taken by the Gujarat High Court.
17. We may add that Article 73, as it stood at the material time, was subsequently amended in 1988 with retrospective effect from January 1, 1940, as follows :
“DISSOLUTION
73. The association shall not be dissolved except by the decision of a majority of three-fourths of the members assembled at a general meeting specially convened for the purpose. The quorum for this meeting shall be three-fourths of the total number of members on the register of members at the time. If upon the winding up or dissolution of the association there remains after the satisfaction of all debts and liabilities and property whatsoever, the same shall not be distributed among the members of the association but shall be given or transferred to some other institution having objects more or less similar to those of the association.”
18. The main test of mutuality is complete identity of the contributors with the recipients. The crucial test of mutuality was laid down by Lord Macmillan in Municipal Mutual Ins. Ltd. v. Hills [1932] 16 TC 430, 448 (HL), in the following terms :
“The cardinal requirement is 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. If this requirement is satisfied, the particular form which the association takes is immaterial.”
19. The identity need not necessarily be of individuals, because it is an identity of status or capacity which matters. Thus individual members of an association may be different at different times, but so long as the contributors and participators are both holding the membership status in the association, their identity would be clearly established and the principle of mutuality would be available to them. The contributors to the common fund and the participators in the surplus must be an identical body, but that does not mean that each member should contribute to the common fund or that each member should participate in the surplus and get back the surplus precisely what he has paid.
20. We respectfully agree with the views taken by the Kerala, Madras, Andhra Pradesh and Punjab and Haryana High Courts that if the members have agreed to a clause that they would not take back the surplus but allow it to be transferred to a similar entity, it would not militate against the doctrine of mutuality, as they themselves are to deal with the surplus, if any, at the time of winding up. It cannot be said that they are not participating in the surplus.
21. In our view, the right of the members of the club regarding the disposal of the surplus at the time of dissolution of the club cannot nullify the principle of mutuality inasmuch as the participators themselves should decide how the surplus fund should be utilised, in the years under consideration. If such a clause destroys the mutuality as held by the Gujarat High Court, it can only arise at the relevant year where such winding up has taken place. Mere inclusion of such a clause cannot by itself lead to the conclusion that there is no mutuality, although the participators in the surplus fund may decide to transfer the fund to similar institutions. If such a situation or eventuality arises, it has to be examined whether the fund has been transferred to a similar institution or not and whether the objects spell out the principle of mutuality.
22. In the instant case, Clause 73 of the articles of association clearly goes to show that the members of the association have got the right of disposal over the surplus. This clause does not put any fetter on their right to dispose of the surplus even at the time of dissolution of the association. Being owners of the surplus fund, the members of the association have a right of disposal in respect of the surplus fund. So, the members who were contributors are also participators in the surplus fund. In our opinion, therefore, there is complete identity between the contributors and the participators in the fund. This principle of mutuality is not destroyed simply because at the time of dissolution of the association the members
have a discretion under Article 73 in the matter of disposal of the surplus fund.
23. For the foregoing reasons, the question in this reference is answered in the affirmative and in favour of the assessee.
24. There will be no order as to costs.
Shyamal Kumar Sen, J.
25. I agree.