1. This case came up on a reference under s. 256(1) of the I.T. Act, 1961.
2. The West Godavari District Rice Millers Association, Tadepalligudem, is the assessee. It is an association of rice millers. For the period September 1, 1970, to March 31, 1971 the assessee admitted an income of Rs. 5,274 under the head 'Other sources'. The gross receipts included Rs. 27,750 being subscriptions received from the members of the association. The balance comprised interest of Rs. 4,974. After deducting various outgoing including an expenditure of Rs. 11,243 in the charity account, the net income was declared at Rs. 5,274. The ITO disallowed the claim for deduction of the expenses in the charity account made some minor adjustments and determined the income in the first stage at Rs. 17,060. To this he added a sum of Rs. 5,17,461, which represented the collections made by the association from its members for construction of a building at Tadepalligudem and Bhimavaram. The association adopted a resolution in the general body meeting held on September 3, 1970, that it would collect monies for construction of buildings. Each member who obtained a permit was required to contribute at the rate of 50 paise per quintal of rice exported. On these facts, the ITO came to the conclusion that the assessee acted as an agent or forum on behalf of the rice millers for obtaining export permits from the State Government. The ITO, therefore, held that the entire collection of Rs. 5,17,461 was taxable under s. 28(iii) of the I.T. Act, 1961. The matter was taken to the AAC in appeal. It was contended before the AAC that the subscriptions from the members were not received for any specific services rendered. It was also contended that the principle of mutuality would apply and, hence, the receipts in the form of subscription would fall outside the ambit of taxation. It was urged that the collections were not made in return for obtaining any permits by the association to its members. The permits issued by the Government and the quantity exported formed only a basis for collecting donations from the members. The AAC held that the association was liable to pay tax only on the interest admitted. He held that the collections for the building fund amounting to Rs. 5,17,461 were not the assessee's taxable income.
3. The Department went up in appeal to the Income-tax Appellate Tribunal. It was contended on behalf of the Department that the amount falls within the mischief of s. 28(iii) of the I.T. Act, 1961. In support of this contention it was contended that the sum of Re. 0.50 paise per quintal collected from the members of the association was remuneration received for performing services to the members within the meaning of s. 28(iii) of the Act and was, therefore, assessable to tax as profits from business. It was also contended that the doctrine of mutuality had no applications to the facts of the present case. The first contention that s. 28(iii) applied was repelled mainly on the ground that the Collector's endorsement dated December 12, 1975, made it clear that the association was not used as a forum for issuing or distributing permits and no service was rendered to the members for obtaining or distribution of permits.
4. The Revenue sought for a reference of the case to the High Court for its decision. In these circumstances, the following two questions are referred for our decision :
'1. Whether, on the facts and in the circumstances of the case, the subscriptions and donations received from the members of the association for the construction of the buildings are eligible to income-tax under section 28(iii) of the Income-tax Act, 1961, or under section 56 of the Act
2. Whether, on the facts and in the circumstances of the case, the assessee can claim immunity from the levy of income-tax under the doctrine of mutuality ?'
5. We wish that the question had been framed the other way. Anyhow we will deal with them in that order. We will first take up question No. 2 viz. whether the assessee could claim immunity from the levy of income tax under the doctrine of mutuality.
6. It is well-settled that the surplus accruing to a mutual association is not income or profit at all for purposes of income-tax, the test of mutuality being completes identity between the contributors and the participants.This is a well-settled principle starting from Styles v. New York Life Insurance Co. (1889) 2 TC 460. The association is a mutual benefit society. It is constituted by the rice millers in West Godavari District for the avowed object of promoting unity among such millers.
7. 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. They contribute not with an idea to trade but with an idea of rendering mutual help. They receive back the surplus which is left after meeting the expenditure of the association which is incurred for the common purpose in the same capacity in which they have contributed. Thus, they receive back what was really their own. The receipt in their hands is not really a profit as no man can make a profit out of himself, just as he cannot enter into a trade or business with himself. Thus, the main test of mutuality is complete with the identity of contributors with the recipients. It is well-settled that the identity need not be necessarily of individuals because it is the identity of status or capacity which matters more. The individual members of an association may be different; but so long as the contributors and recipients 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, if such a mutual concern receives any income the surplus of which goes back to the contributors of the said income. Now these are the well-settled principles on the question of mutuality. But, Mr. M.S.N. Murthy, the learned counsel for the Department, relied upon r. 21 of the memorandum of association which says that the surplus should be transferred to some other associations having similar objects. He submits that since there is a ban on the surplus going to the members, there is not identity between the contributors and the recipients. In support of his contention, the learned counsel relied upon a decision of the Gujarat High Court in CIT v. Shree Jari Merchants Association 0044/1973 : 106ITR542(Guj) . In this case, r. 38 of the constitution of the assessee-association provided that the surplus assets should be used as per the decision of the association at the time of its dissolution. On a construction of this rule, the Gujarat High Court held that there was no identity between the contributors and the recipients and the assessee, therefore, could not claim exemption from tax on that ground. But Sri Anjaneyulu, the learned counsel for the petitioner, strongly relied upon the decision of the Madras High Court in CIT v. Madras Race Club : 105ITR433(Mad) and two decisions of this court in CIT v. Merchant Navy Club : 96ITR261(AP) CIT v. Secunderabad Club (R.C.C. No. 10 of 1974) dated December 3, 1975, : 150ITR401(AP) . We shall refer to the decision of the Madras High Court in CIT v. Madras Race Club : 105ITR433(Mad) . In this case the contention of the Revenue was that the application of the principle of mutuality was excluded because the memorandum of association provided that there could be no distribution of profits and that at the time of winding up, the surplus was not divisible among members but had to be made over to entities having similar objects. The Madras High Court repelled this contention and observed as follows (headnote) :
'The memorandum and articles of association 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. This 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.'
8. This case, in our opinion, is directly applicable to the facts of the present case. Rule 21 of the memorandum of association says that the surplus should not go to the members and it should be made over to association with similar objects by a decision of 3/5ths majority of the association is almost in identical terms. As the owners of the property, they decided that it should be given to associations with allied objects, it is difficult to say that the doctrine of mutuality is not attracted. The Madras High Court quoted with approval the ratio of the decision in IRC v. Eccentric Club Limited (1925) 12 TC 657 of the House of Lords. In that case, there was a club which was incorporated as a company. The objects of the company were to promote social relations amongst gentlemen connected with literature, art, music, drama, etc. and conducted a club of non-political character. The members and their friends were to be given the privilege advantages, convenience and accommodation of the club. Similar to our clause 21 in this case, there was clause 6 of the memorandum which provided that no member of the club in his character as such member was entitled to receive, directly or indirectly, any dividend, bonus or other profit out of such income or property of the club. On the winding up of the club, the surplus, if any, was not to be distributed among the members, but was to be given or transferred, as the committee of management might determine. With all these features it was held that the doctrine of mutuality would apply and the amount was not liable to be taxed.
9. The same principle was enunciated in Addl. CIT v. Secunderabad Club (R.C. No. 10 of 1974 dated 3-12-1975) : 150ITR401(AP) . With respect, we are inclined to follow the decisions of the Andhra Pradesh High Court and the Madras High Court which accepted the principle laid down in the House of Lords case, viz. IRC v. Eccentric Club Limited (1925) 12 TC 657 in preference to the decision of the Gujarat High Court in CIT v. Shree Jari Merchants Association 0044/1973 : 106ITR542(Guj) .
10. Thus we are of the view that the doctrine of mutuality applies to the present case and r. 21 of the memorandum of association does not militate against the application of this doctrine. Consequently, we hold that the subscriptions and donations received from the members of the association for construction of the building are not taxable.
11. Now, we take up the first question, viz., whether the subscriptions and donations received from the members of the association are eligible to tax under s. 28(iii) or s. 56 of the Act. This question consists of two parts, viz. whether it is eligible to tax under s. 28(iii) of s. 56 of the Act. Having regard to the opinion expressed on question No. 2 that the doctrine of mutuality applies, we hold that s. 56 of the Act has no application. The only aspect to be considered is whether s. 28(iii) of the Act is attracted.
12. Section 28(iii) of the I.T. Act is as follows :
'28. The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession' ......
(iii) income derived by a trade, professional or similar association from specific services performed for its members.'
13. From the language it is clear that income derived by a trade or association from specific services performed for its members alone is eligible to tax. This is the nature of an exception to the principle of doctrine of mutuality.
14. Now let us examine the facts of this case in the light of s. 28(iii) of the Act.
15. The assessee-association was formed by the Rice Millers of West Godavari District for the object of promoting unity among such millers as manifested from the articles of association. The association passed a resolution No. 13/70 in which is was resolved that all members should contribute 0.50 paise per quintal on all the damaged and discoloured rice and broken rice permits and that members of Bhimavaram and Tadepalligudem Millers Association should provide suitable sites. They also resolved to request the members of the Bhimavaram Paddy and Rice Merchants Association, though they are not members of the assessee-association for donations. Pursuant to this resolution, amounts were collected from members as well as non-members of the association. The amounts thus received were not for any specific services rendered for its members. The learned counsel for the Department relied upon a letter written by the secretary of the association to the ITO, Tanuku, to the effect that during September, 1970 and August 1971, the trade obtained permits for export of rice and broken rice outside the State and the Government chose the association as the forum for distribution and issuance of the permits. Excepting this general statement, there are no other details. What exactly the secretary meant by saying that the association was used as a forum is not clear from the letter. As against this piece of evidence, the assessee filed and endorsement of the District Collector dated December 12, 1975, that permits for export of rice and broken rice were issued under the export incentive scheme during 1970-71 crop season and that they were issued directly to millers and dealers on the basis of their individual performance under the scheme. The Collector further clarified that the association did not play any role or render any service to millers either in securing the permits or in their distribution and that permits were issued both to members as well as non members of the association directly. The Tribunal attached great weight to the endorsement of the District Collector which is clear and unequivocal than the letter of the secretary and we see no reason to differ from the conclusion of the Tribunal. The mere fact that the endorsement was obtained during the pendency of the appeal does not in any way affect its credibility, coming as it does from a responsible official like the District Collector. In addition to this, the several receipts issued by the association show that contributions were made as donations. In the light of the unclinching evidence, we are unable to say that the contributions made towards the building fund represented charges for any services rendered. Consequently, we hold that s. 28(iii) of the I.T. Act is not attracted.
16. In the result, the answers to both the questions are in the negative and in favour of the assessee. No costs. Advocate's fee Rs. 350.