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Judgment
Jawahar Lal Gupta, J.—The Tribunal has referred the following question for the opinion of this court :
"Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the contribution of Rs. 21,205, Rs. 47,434 and Rs. 68 633 received by the assessee for the relevant assessment years 1977-78, 1978-79 and 1979-80, respectively, from its members was not exempt on the principle of mutuality ?"
The petitioner-assessee is a co-operative society. It provides technical advice to the member-societies in lieu of the subscriptions. The petitioner received contributions from its members during the three years as noticed above. It claimed that the contributions made by the member-societies were not exigible to the levy of Income Tax by the principle of mutuality. The Assessing Officer rejected the claim. The order having been confirmed by the Appellate Assistant Commissioner and the Tribunal, the assessee filed a petition u/s 256(1) of the Income Tax Act, 1961. Hence, this reference.
Mr. Garg, learned counsel for the petitioner, contends that in view of the provisions of Section 59(k) of the Punjab Co-operative Societies Act, 1961, as also the rules and bye-laws, the assessee has complete control over the funds. The activity cannot be described as a trade or profession and the contributions by the members to the assets of the petitioner do not constitute profits and gains of business or profession. Reliance has been placed on the decision of a Bench of this court in Commissioner of Income Tax Vs. Northern India Motion Pictures Association, and to the pronouncement of the apex court in Chelmsford Club v. CIT [2000] 243 ITR 89.
The claim made on behalf of the assessee has been controverted by Mr. Sawhney, learned counsel for the Revenue.
For a proper consideration of the contention raised by counsel for the petitioner, it would be appropriate to notice the relevant provisions under the Punjab Co-operative Societies Act, 1961, and the Rules, etc. These are as under :
"59. Powers of liquidator.--(1) Subject to any rules made in this behalf, the whole of the assets, of a co-operative society, in respect of which an order for winding up has been made, shall vest in the liquidator appointed u/s 58, from the date on which the order takes effect and the liquidator shall have power to realise such assets by sale or otherwise.
(2) Such liquidator shall also have power, subject to the control of the Registrar.
(k) after consulting the members of the society, to dispose of the surplus, if any, remaining after paying the claims against the society, in such a manner as may be prescribed."
Rule 65 provides as under :
"65. Disposal of surplus assets (Section 59(k).--After discharging the liabilities of the co-operative society and repayment of share capital, the liquidator may utilise the surplus assets, if any, for one or more of the following purposes :
(a) deposit the amount in a co-operative bank until a new co-operative society with similar area of operation is registered when it shall be credited to the reserve fund of the new co-operative society ;
(b) any purpose connected with the development of the co-operative movement, subject to the approval of the Registrar ;
(c) an object of public utility selected with due regard to the wishes of the members and approved by the Registrar."
The relevant provisions of the bye-laws read as under :
"5.3--To represent the cause of labour co-operatives in the State.
5.4--To carry out publicity and propaganda in the interest of labour co-operatives.
14.7--Collection of contribution from the union/societies of deductions made from payments received by societies on works at a rate to be fixed by the board of directors with the approval of the Registrar, Co-operative Societies, Haryana, Chandigarh."
A perusal of the provisions of Section 59 shows that when a co-operative society is ordered to be wound up, the assets vest in the liquidator. He can deal with the assets subject to the control of the Registrar. The surplus funds have to be dealt with in accordance with the provisions of Rule 65. The amount can be deposited in a co-operative bank or expended for the development of the co-operative movement or an object of public utility. The members can, undoubtedly, express a wish but the control is of the Registrar. The members cannot ask for refund of the surplus funds.
Mr. Garg contends that under the bye-laws the contributors have a discretion. They can choose the manner and method of disposal of the funds.
On a perusal of the provision, it is clear that the funds can be spent to represent the cause of the labour co-operative societies ; for publicity and propaganda, etc. Still further, the societies have the power to collect contributions, etc., at a rate to be fixed by the board of directors with the approval of the Registrar. Neither the assessee nor the contributors have complete control over the funds.
Mr. Garg contends that by virtue of the doctrine of mutuality the contributions made by the members cannot be treated as income.
If the requirements of the principle of mutuality are satisfied, the contention is unexceptionable. However, "mutuality" implies that the members act for mutual benefit.. It involves an element of reciprocity. The funds are collected and spent for mutual good. The surplus is returned to the contributor. The contributors have complete control over the funds.
What is the position in the present case ?
The members-societies have made contributions to the funds of the petitioner-assessee. Once the funds have been received by the assessee, the contributors have no control over the funds. They cannot direct that the amount which remains after meeting the expenses should be returned to them. The funds can only be used for the purposes mentioned in Rule 65. The provision does not envisage refund of the funds to the members. In this situation, the principle of mutuality is not attracted.
Mr. Garg has referred to the decision in the case of Commissioner of Income Tax Vs. Northern India Motion Pictures Association, . Their Lordships were considering the provisions of Clause 7. However, we find that after this decision, there is an authoritative pronouncement of their Lordships of the Supreme Court in the case of Chelmsford Club [2000] 243 ITR 89. It has been laid down by their Lordships that in cases (page 96) ". . . 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". Their Lordships have laid down the three tests before the principle of mutuality can be applied. In a nutshell, these tests are :
The identity of the contributors to the fund and the recipients from the fund.
The organisation exists only for mutual benefit.
The funds can be expended for mutual benefit or returned to the contributors.
It is only when these tests are fulfilled that the principle of mutuality can be applied.
In the present case, the assessee is under no obligation to return the funds to the contributors. Thus, it cannot invoke the principle of mutuality.
The view taken by the Tribunal is correct.
Resultantly, the question as posed above is answered against the assessee and in favour of the Revenue. There will be no order as to costs.