Per Shri V. P. Elhence, Judicial Member - This is an appeal filed by the assessee against the order dated 20-2-1981 of the learned Commissioner (Appeals).
2. The assessee, J. K. Organisation, Kamla Tower, Kanpur is an AOP. The assessment year in question is 1976-77. With the consent of both the parties, arguments were heard by us only on the preliminary point whether the assessee is constituted on the principles of mutuality and, therefore, not liable to be taxed.
3. The facts relevant to the point at issue are as follows. The assessee association is registered under the Indian Trade Unions Act, 1926, whose membership is confined to persons whose undertakings in business, trade, industry, and agriculture form part of or are connected with the J. K. Group of undertakings or who are trustees under a trust made by any member or members thereof. Among the objects of the association (which are specified under rule 3 of its rules and regulations) the following are also included the main object being to regulate the relations between members and their employees and between members and members :
'(i) To promote and protect the trade, commerce, industry and agriculture in which the members of the association are or may be concerned and to impose restrictive conditions on the conduct of such trade, commerce, industry and agriculture.
(ii) To formulate and recommend to members common administrative policies and to settle questions of common interest and to protect the members of the association against competition.
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(iv) To formulate and regulate terms and conditions of employment of the employees of its members and to start, organise, establish and maintain labour relations and labour welfare organisations.
(v) To consider all questions affecting trade, commerce, industry and agriculture in which members are or may be concerned and to the all necessary action in connection therewith.
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(vii) To engage the services of technical and other advisers and experts for the benefit of the trade, commerce, industry and agriculture in which the members of the association are or may be concerned.
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(x) To establish a fund or funds for the purpose of -
(a) legal assistance
(b) all activities undertaken for furthering all or any of its objects
(c) payment of remuneration to technical or legal experts, secretaries and staff.
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(xii) To draw, accept, endorse, discount or otherwise deal with cheques, hundis, bills of exchange and other negotiable instruments and to open and operate account or accounts with any firm or firms, bank or banks in connection with the business of the association.
(xiv) To invest the moneys not immediately required for the purposes of its administration.
(xv) To borrow or raise any moneys required for the purposes of the association.
Rule 9 provides that every member shall pay to the association such sum or sums on account of his annual subscription and such further sum or sums on account of contribution, as the Central Board may determine from time to time either on the basis of the number of persons employed or on the basis of the total emoluments paid to employees or on the basis of the capital employed or on the basis of the turnover, or on the basis of the net profits earned or on the basis of the services expected to be rendered by the association or on the basis of a lump sum or on any other basis or partly on one basis and partly on another or on varying basis in respect of the different members.'
Rule 17 provides that a general meeting of the members shall be held in each year (not later than 30th June) at which the subscriptions fixed by the Central Board for the ensuing year and the accounts of the previous year shall be levied on the table for information. Rule 26(b) provides that all moneys on account of subscriptions, fines or other contributions, which it is obligatory on the members to pay, shall be credited to the general fund and that no expenditure from such fund shall be made in contravention of section 15 of the Indian Trade Unions Act, 1926, but may be applied towards the carrying out of the objects of the association. Rule 35 provides that in the event of dissolution, the Central Board shall wind up the affairs of the association and after all the debts and outstanding of the association have been satisfied, the balance of the funds of the of the association representing accumulated subscriptions and interest of any other assets of the association shall be distributed amongst the members of the association as far as possible upon the basis of the scale upon which such members are contributing to the association at the time of its dissolution. Lastly, rule 37 prescribes the procedure for the amendment of the rules.
4. For the assessment year in question the assessee filed its return showing an income of Rs. 4,498 by deducting an amount of Rs. 22,810 as the carry forward of unabsorbed losses from the gross income of the year amounting to Rs. 27,308. The ITO observed that Shri D. C. Awasthi, secretary, taxation department, was devoting his attention to the income tax and other personal cases of the members of the Central Board, their wives and children, etc. Shri S. S. Jain, the accountant, the ITO observed had also been attending the income-tax office in connection with the assessment proceedings of the family members. He, therefore, disallowed 75 per cent of the total expenditure claimed at Rs. 2,46,192 as not being for the objects of the assessee and framed the assessment accordingly on total income of Rs. 1,76,468.
5. The assessee, being aggrieved, came up in appeal before the Commissioner (Appeals). Besides other contentions, the contention raised on behalf of the assessee there was that its income could not be assessed on the ground of mutuality. However, the learned Commissioner (Appeals) took the view that the test of mutuality was not satisfied.
6. That is how this preliminary point has been raised again on behalf of the assessee in the appeal before us. Dr. R. C. Vaish, the learned Chartered Accountant for the assessee, took us through the rules and regulations of the assessee also through its annual report and accounts for the period 1-1-1975 to 31-12-1975. He emphasised that there was a complete identity between the contributors and the participators of the surplus and so the assessees income could not be taxed. In this connection he reiterated the reliance on the decision of the Honble Andhra Pradesh High Court in the case of CIT v. Merchant Navy Club : 96ITR261(AP) . He also referred to the decision of the Honble Allahabad High Court in the case of CIT v. Cawnpore Club Ltd.  14 Taxman 211 in which the case of National Association of Local Government Officers v. Watkins (Inspector of Taxes)  18 TC 499 was referred to. According to him, the reasons of which the learned Commissioner (Appeals) based his decision were not tenable. On the other hand, Shri R. K. Upadhyay, the learned departmental representative, strongly supported the order of the learned Commissioner (Appeals). In this connection he also referred to the commentary of Chaturvedi and Pithisaria entitled Income-tax Law at pages 212 and 213 of Volume I (Third Edition). Shri Upadhyay also pointed out that in the earlier years the assessee had not raised any objection to being assessed and was showing to income under the head income from business. In reply, Dr. Vaish urged that the assessee could not be debarred from raising the question of taxability for the assessment year in question even though this point was not raised earlier.
7. We have considered the rival submissions. Firstly, we agree with the submission made by Dr. Vaish that notwithstanding the fact that the assessee suffered assessment and taxation in the earlier years, there can be no bar against the assessee in raising the question of the taxability of the receipts in the hands of the assessee on the principle of mutuality.
8. The essence of the principle of mutuality lies in the fact that there should be the rendition of some amenities, benefits, conveniences, facilities or services to the members at their cost. In order to attract the application of this principle, the contributors to the common fund and the participators in the surplus has been an identical body. But as held in the case of Merchant Navy Club (supra) 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. It does not make any deference whether the surplus is paid to the members or carried to a reserve for application to the improvement of the mutual benefit or organisation and for providing better facilities for the members of that it is not distributed in precisely the proportions in which the members contribute to the surplus. In the case of Merchant Navy Club (supra) their Lordships of the Andhra Pradesh High Court referred to the observations of Wheat Craft in Law of Income-tax, Surtax and Profits Tax to the effect that 'it does not matter that the class may be diminished by persons going out of the scheme or increased by others coming in'. In the case of Cawnpore Club Ltd. (supra) though the headnote of the law report gives a different impression, it is seen from the full report that what the Honble High Court decided was that in the case of a club, like the one in that case, which is run for the benefit of members, the income accruing to the club from the letting out of accommodation in that club or providing of facilities to them for payment, was not liable to tax, for no one could trade with himself. In other words, on the principle of mutuality the income accruing to a club in the circumstances where it dealt with its members alone and did not carry on any commercial activity as such, was not liable to tax for there could be no trade with ones self. Thus, the essence of mutuality is only to find out whether the club trades faith an outside body. The same association may carry on mutual activities resulting in a non-taxable surplus and also in non-mutual activities resulting in taxable profits, like profit derived from subscriptions and charges paid by non-members.
9. A perusal of the order of the learned Commissioner (Appeals) shows that two considerations weighed with him in coming to the conclusion that the test of mutuality was not satisfied in the present case. Firstly, he imagined that if the assessee-association were to be dissolved on 31-12-1975, it would distribute to the members as they existed on the date of dissolution and the amount of capital fund and the subscriptions may be paid by persons who may not remain the members now or some new members would have joined later and may not have contributed to the capital fund. On this consideration the learned Commissioner (Appeals) held that it could not be said that there was a complete identity between contributes and the participators of surplus. On facts, these premises would not hold for the assessment year in question since, as pointed out by Dr. Vaish, no new members were enrolled during the year and the members on roll stood at the figure of 59 at the end of the year (vide para 4 of the statement of affairs of the Central Board as appearing in the assessees annual report and accounts for the period 1-1-1975 to 31-12-1975). Even otherwise the point taken up by the learned Commissioner (Appeals) would not be tenable because as already observed, it was referred to in the case of Merchant Navy Club (supra), and it was held that it does not matter that the class may be diminished by persons gong out of the scheme or increased by others coming in. A perusal of the rules and regulations of the assessee-organisations shows that the objects of the association concerns only members and not any non-members. Further, as we have have already seen above, no non-member is entitled to any amenity benefit, convenience, facility or service and every member has to pay subscriptions and contributions in accordance with rule 9. Rule 35 also provides for distribution of the surplus amongst members, in the event of the dissolution of the assessee-organisation. The share in the surplus which each member has, is not important. Thus, the learned Commissioner (Appeals) was not justified in observing that there was no complete identity between contributors and the participators of service. The only source of the receipts of the assessee organisation is from subscriptions and contributions from members. The cases digested at pp. 212-213 of Chaturvedi and Pithisarias commentary, relied upon on behalf of the revenue have been gone through and on facts they do not help it.
10. The second consideration which weighted with the learned Commissioner (Appeals) was that a number of services were being made available to persons who were non-members and who had not contributed at all to the association either by way of contributions or subscriptions. He noticed that Shri D. C. Awasthi, the secretary, taxation department, had been appearing in the income-tax matters of ladies who were not the members of the association but who were related to the members. He observed that the objects of the association do not provide for rendering such assistance. For this reason also the learned Commissioner (Appeals) concluded that it could not be said that the contributors and the beneficiaries of the services rendered by the association were identical. In this connection it may be noticed that as pointed out by Dr. Vaish, Shri D. C. Awasthi himself was not examined by the ITO. Secondly, as we have seen none of the objects of the assessee-organisation provided for the rendition of any amenity, benefit, convenience, facility or service to a non-member nor is there any provision for contribution or subscription being taken from any non-member.
An organisation like assessee, which has rules and regulations, can only act within the framework or in accordance with its rules and regulations. Even if any employee of the organisation were to do any act which is inconsistent with or in breach of the said rules and regulations, it would only amount to an unauthorised activity on the part of the employee which could not have the effect of changing the rules and regulations of the assessee-organisation or of its objects for the amendment of which a special procedure is prescribed under rule 37. Thirdly, even if we were to assume that Shri Awasthi had been appearing in the income-tax matters of the ladies of the members who were not themselves members, it could at best amount to a person on the part of Shri Awasthi in his personal or private capacity. In case such appearance on the part of Shri Awasthi was in breach of the contract of his employer, the action in that regard lay with the appropriate management authority but it could not affect the nature of the assessee-organisation. An alternative submission was also made in regard to this point by Dr. Vaish and that submission was that at best any income derived from the rendition of any amenity, benefit, convenience, facility or service to a non-member could become taxable but that it could not affect the nature of the receipts in the hands of the assessee-organisation. He also pointed out that there was no evidence whatsoever that any income was derived in the above manner from any non-members. In our view the above submissions made on behalf of the assessee are quite correct. We have also gone through the annual report of the assessee-organisation for the period 1-1-1975 to 31-12-1975 wherein the statement of affairs shows that the activities of the assessee-organisation were for the mutual benefit of the members. It also shows that the only source of income of the assessee was from subscriptions. The assessee has given a comparative statement showing total subscription, total expenditure and total establishment expenses from 31-12-1970 to 31-12-1974 year-wise. They show that ad hoc subscription is taken from the members and if at the end of the year it is found that the total expenditure was less than the total subscription collected, the subscription taken from the members for the next year is correspondingly reduced and similarly, if the total expenditure exceeds the total subscription the subscription next year is increased. We have also seen the details of the members of the staff of the assessee-organisation and their designations and duties assigned to them. The foregoing evidence and the material clearly shows that there was complete identity between the contributors and participators of surplus and that the principle of mutuality has been provided in the assessee organisation and genuinely followed by it. Therefore, in view of the foregoing discussion, we hold that the assessee is constituted on the principles of mutuality and is, therefore, not liable to be taxed.
11. The appeal filed by the assessee is accordingly allowed.