BANERJEE J. - This is a reference under section 66(1) of the Indian Income-tax Act, 1922.
The relevant assessment years are 1957-58 and 1958-59, the corresponding previous years being, respectively, the years ended with December 31, 1956, and December 31, 1957.
The assessee is an association of persons, known as the Automobile Association of Bengal (now as the Automobile Association of Eastern India). The Association is a mutual concern, run on no profit basis and was formed, inter alia, with the following objects (pages 26-27 of the paper book) :
(a) to establish, maintain and conduct a club for accommodation of its members and their friends and to provide a Club House and other conveniences and generally to afford to members and their friends all the usual privileges, advantages, convenience and accommodation of a club;
(b) to promote the interests of motorists and to provide means of social intercourse amongst them;
(c) to consider and discuss all questions affecting the interests of motorists and the alteration or administration of the law and all police and municipal rules and regulations relating to or in any way affecting them;
(d) to promote an interest in the knowledge and use of automobiles of every kind by lectures, discussions, books and correspondence.
The services rendered by the Association to its members, inter alia, are (page 19 of the Paper Book);
(i) Free legal advice and defence in approved cases.
(ii) Free road breakdown service in Calcutta, Patna and Asansol.
(iii) Free touring itineraries.
(iv) Free tax and licence 'reminder' and 'renewal' services.
(v) Free services of car attendants at parking places.
(vi) Supply of engineers for examination of cars at nominal fees.
(vii) Introduction of drivers on no fees basis.
(viii) Driving tuition at nominal fees.
(ix) Associate Membership of the R.A.C. England at reduced fee. Entrance fee waived.
(x) Full privileges of the A. A., England, at reduced fee. Entrance fee waived.
(xi) Reciprocal privilege of Western India A.A.,A.A. of Upper India, A.A. of Southern India, U.P.A.A. and also of Automobile Club of Ceylon, Automobile Association of Burma and the A.A. of Malaya.
The assessee Association used to publish a monthly magazine the object of such publication being the training of drivers in safe and better motoring, obedience of traffic rules and laws, maintenance of vehicles, publication of the Government notifications free of charge for benefits limited to members. The assessee Association used to accept advertisements, for publication in the magazine from members as well as non-members and used to charge for publication of advertisements. During the assessment year 1957-58, the assessee Association received Rs. 10,673 from members and Rs. 30,042 from non-members as advertisement charges. The total cost of production of the magazine came up to Rs. 23,255. For the assessment year 1958-59, the assessment Association received Rs. 8,175 from members and Rs. 13,882 from non-members as advertisement charges. The total cost of production of the magazine in this year, came up to Rs. 25,033. The assessee Association contented that the advertisement charges received from members, who had published advertisement in the magazine, were not taxable as income. In alternative the assessee Association contented that the entire cost of production of the magazine should, in any event, be deducted in computing the income from advertisement. The Income-tax Officer did not accept the contention of the assessee Association that advertisement charges received from members, who had published advertisement in the magazine, were not taxable. He, therefore, included the advertisement charges, received from members as well as non-members, in computation of the total income of the assessee. The Income-tax Officer did not also accept the claim of the assessee that the whole of the cost of production of the magazine should set off against advertisement receipts. He merely allowed deduction in respect of such party of the total cost of production as was attributable to the production of the advertisement portion of the magazine, namely 35 per cent.
Aggrieved by the assessment order, the assessee Association appealed before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner dismissed the appeals with observation that the realisation of advertisement charges arose from profits earning motive resulting in financial benefit to the appellant and was tainted with commerciality.
Thereupon, the assessee Association preferred a second appeal before the Income-tax Appellate Tribunal. The Tribunal also agreed with the order made by the Appellate Assistant Commissioner with the following observation.
'We agree with the Appellate Assistant Commissioner that such advertisement charges are liable to tax in view of the specific provision of section 10(6) which provides :
A trade, professional or similar association performing specific services for its members for remuneration definitely related to those services shall be deemed for the purpose of this section to carry on business in respect of those services, and the profits and gains therefrom shall be liable to tax accordingly.
The advertisement charges from members are definitely related to the specific services rendered by the Association in bringing their goods, etc., to the notice of the other members of whom the number is legion. The appellant claims that the entire costs of the production of the magazine should in any case be deducted from the advertisement receipts. We cannot accept the claim. The Income-tax Officer has allowed deduction on the basis of cost of printing attributable to the number of pages covered by the advertisements (from members and non-members) which is, in our opinion quite fair and just.'
Aggrieved by the order of the Tribunal, the assessee Association obtained a reference to this court on the following two question of law :
'(1) Whether, on the facts and in the circumstances of the case, the advertisement charges received by the assessee from its members are liable to tax in view of section 10(6) of the Indian Income-tax Act ?
(2) Whether, on the facts and in the circumstances of the case, the entire cost of the production of the magazine was deductible from the assessees receipts from advertisement ?'
Mr. S.R. Banerjee, learned counsel for the assessee Association, Submitted that the assessee was a mutual concern run on no profit basis. This characteristic of the assessee Association was not disputed by Mr. Sabyasachi Mukherjee, learned counsel for the revenue. Now, section 10(6) of the Indian Income-tax Act, Mr. Banerjee contented, applied only to 'a trade, professional or similar association performing specific services for its members for remuneration definitely related to those service.' According to Mr. Banerjee, the activities of the assessee Association did not satisfy the description under section 10(6) of the Indian Income-tax Act. Therefore, the provision of that section was not applicable to the assessee and the assessee must not be deemed, for the purposes of section 10(6), to carry on business in respect of those services. In support of this contention he strongly relied upon a decision of the Supreme Court in Commissioner of Income-tax v. Royal Western India Turf Club Ltd. In that case, the assessee, the Royal Western India Turf Club In that case, the assessee, the Royal Western India Turf Club Limited, was a company limited by guarantee and carried on the business of a race course company and of licensed victuallers and refreshment purveyors. The assessee had two main categories of members, who, on their election as members, paid an entrance fee and periodical subscriptions, which were not charged to tax. Members were provided with a separate enclosure to watch the races for which an admission fee was charged and non-members were not admitted in this enclosure. The assessee gave to members, namely, use of an unreserved seat in a stand, facility to watch the races and to bet on the horses in the races use to the totalisator in that stand and facilities for refreshments, The daily ticket fee for admission into the members enclosure was the same as that for admission into the public enclosure. The assessee claimed that in computing its total income, the following items of receipts arising from, (1) season admission tickets from members, (2) daily admission gate tickets from members, (3) use of private boxes by members and (4) income from entries and foreits received from the members whose horses did not run in the races during the season should be extended. The High Court held that the first three items were not taxable either under section 10(1) or section 10(6) and that the fourth item was taxable under both the sub-section. On appeal to the Supreme Court by the Commissioner, it was held that as there was no mutual dealing between the members inter se in the nature of mutual insurance, all the item of receipts from members were received by the assessee from business with its members within the meaning of section 10(1) and that they were therefore assessable to tax. In the course of that judgment the Supreme Court negatived the contention that any of the receipts was received by the assessee as a trade, professional or similar association within the meaning of section 10(6). The relevant observation of the Supreme Court, on this point, is set out below :
'What is the meaning of a trade or professional or similar association Does this company come within any those description It is certainly not a profession association. Learned counsel for the company contends that a trade association is not the same thing as a trading association. According to Websters New International Dictionary, 2nd edition, page 264, the meaning of a trade association is an association of tradesman, businessmen or manufactures for the protection and advancement of their common interest. In our view the company before us is not a trade association in this sense although it carries on a business. In this view of the matter it is unnecessary to discuss the further question whether the facilities or amenities given by the company to its members may regard as services within the meaning of section 10(6). We are of opinion that section 10(6) has no application, for the company is not a trade or professional or similar association with in the meaning of that sub-section.'
Mr. Mukherjee did not dispute the proposition that the assessee-Association was not a trade, professional or similar association performing specific services for its members for remuneration definitely related to these services. He did not therefore, try to repel the contention that section 10(6) of the Indian Income-tax Act was not correctly applied to the case of the question No. (1) in the following manner : 'Whether, on the facts and in the circumstances of the case, the advertisement charges received by the assessee from its members are liable to tax ?' - and then answer the same. The circumstances on which he particularly relies were, (1) Neither the Income-tax Officer nor the Appellate Assistant Commissioner Applied the provision of section 10(6) to the assessee - they proceed to assess the income either under section 10(1) under section 12 of the Indian Income-tax Act; (2) the Appellate Tribunal, while agreeing with finding of the Income-tax Officer and the Appellate Assistant Commissioner that the income from advertisement was chargeable to tax, invoked section 10(6) of the Act, which may not have been right. He submitted that in such circumstances it was proper for this court to reframe the question properly and then answer the same. In support of this contention he strongly relied on the judgment of the Bombay High Court in Ismailia Grain Merchants Association Limited v. Commissioner of Income-tax in which Chargla C.J. and Tendolkar J. observed :
'.... The real controversy between the assessee and the taxing department is whether the assessee is liable to tax. Even though he may not be liable to tax under one provision of the Act, If he is liable under another provision and that liability clearly arises from the facts stated in the statement of the case, then it is open to us to say that we disagree with the view of the Tribunal that the assessee is liable under section 10(6), but that he is liable under some other provision of the Act.'
Mr. Mukherjee submitted that, for the purpose of reaffirming the question, the facts as in the statement of the case would be sufficient and no further fact would have to be examined and in the fitness of things, the question should not be answered in favour of the assessee, if the assessee was otherwise liable to tax, only because the assessee was sought to be taxed under an inappropriate section of the Indian Income-tax Act.
Mr. Banerjee, for the assessee, made an earnest effort to repel the contention, on behalf of the revenue, that the question should be reaffirmed and then answered. He invoked a decision of the Supreme Court in Kusumben D. Mahadevia v. Commissioner of Income-tax, in support of his contention. In that case, the assessee, a resident of British India, held shares in a company, which had its registered office at Bombay and was resident and ordinarily resident in British India. She received a sum of Rs. 47,120, which represented dividends declared by the company out of profits derived by it in the Native State of Baroda, outside British India. The assessee did not bring these dividends into British India. She claimed the benefit of paragraph 4 of the Merged States (Taxation Concessions) Order, 1949, in regard to these dividends. The Appellate Tribunal did not address itself to the question whether the order applied to the assessee, but decided the question of assessability on the ground that the income had not arisen in Baroda but in British India. At the instance of the assessee, the Tribunal stated a case to the High Court and referred the following question : 'Whether the net dividend income of Rs. 47,120, accrued to the assessee in the former Baroda State, or whether it was income accrued or deemed to have accrued to the assessee in British India ?'
The High Court was of opinion that the Tribunal ought to have decided and referred also the question whether the order applied to the assessee and reframed the question, so as to comprehend the two points of law, as follows : 'Whether the assessee is entitled to any concession under the Merged States (Taxation Concessions) Order, 1949, with regard to the net dividend income of Rs. 47,120 ?' The High Court held that paragraph 4 of the order did not apply to the assessee but did not decide whether the income had accrued to the assessee in British India. On appeal, the Supreme Court disapproved of the reframing of the question by the High Court with the following observation :
'The Tribunal did not address itself to the question whether the Concessions Order applied to the assessee. It decided the question of assessability on the short ground that the income had not arisen in Baroda but in British India. That aspect of the matter has not been touched by the Bombay High Court. The latter has, on the other hand, considered whether the Concessions Order applied to the assessee, a matter not touched by the Tribunal. Thus, though the result is the same so far as the assessment is concerned, the grounds of decision are entirely different.
The High Court felt that the question framed by it comprehended both the aspects and perhaps it did. But the two matters were neither coextensive, nor was the one included in the other. The question of accrual of income was to be decided under the Income-tax Act, and has but little to do with the Concessions Order. That question can be adequately decided on the facts of this case without advertence to the Concessions Order. It cannot, therefore, be said to be either co-extensive with or included in the decision of the question actually considered by the High Court, to wit, whether the Concessions Order applied or not. If this be so, it is manifest that the Tribunal decided something which stands completely outside the decision of the Bombay High Court. The High Court also decided a matter which was not considered by the Tribunal even as a step in the decision of the point actually decided. The two decisions are thus strangers to each other, though they lead to the same result.
Section 66 of the Income-tax Act which confers jurisdiction upon the High Court only permits a reference of a question of law arising out of the order of the Tribunal. It does not confer jurisdiction on the High Court to decide a different question of law not arising out of such order. It is possible that the same question of law may involve different approaches for its solution, and the High Court may amplify the question to take in all the approaches. But the question must still be one which was before the Tribunal and was decided by it. It must not be an entirely different question which the Tribunal never considered.... Indeed, the High Court itself felt that there were two limbs of the question of assessability and reframed the question to cover both the limbs. where the High Court went wrong was in not deciding both the limbs but one of them and that too, the one not decided by the Tribunal. The resulting position can be summed up by saying that the High Court decided something which the Tribunal did not and the Tribunal decided something which the High court did not. this is clearly against the provisions of section 66.'
In our opinion the Supreme Court decision relied on by Mr. Banerjee does not help him in this case. The question before the Tribunal was the assessability of advertisement charges received by the assessee from members as income. The contention of the assessee was that, inasmuch as it was a mutual society, run on no profit basis, the advertisement charges received were not liable to income-tax. This contention was negatived by the tribunal on merits. The Tribunal, however, did not express the view whether the income of the assessee was assessable under section 10(1) or under section 12 of the Indian Income-tax Act. The Tribunal came to the same view as the Appellate Assistant Commissioner, namely, that the advertisement charges received by the assessee-Association from non-members were income in its hand. The Tribunal, however, expressed the further opinion that such income was assessable under section 10(6). Thus the Appellate Assistant Commissioner and the Tribunal both had the opportunity of considering the case whether the advertisement charges received by the assessee-Association from members should be included in the income of the assessee-Association. The same question is being agitated before us, with this modification that even if the advertisment chargers received from members be deemed to be the income of the assessee, the same cannot be taxed under section 10(6) of the Act. The contention of the revenue before us is that the advertisement charges received from members is income in the hands of the assessee-Association even though the same may not be taxed under section 10(6), the assessee not being a trade association. We are thus not called upon to consider a case which was a stranger before the Tribunal. We, therefore, accept the contention of Mr. Mukherjee, that in the facts and in the circumstances of the case, we should reframe the question in the following manner : 'Whether, on the facts and in the circumstances of the case, the advertisement charges received by the assessee from its members are liable to tax ?' and then answer the same.
Mr. S.R. Banerjee, for the assessee-Association, submitted that if we choose to reframe the question, the answer should be in the negative, because the assessee was a mutual concern, run on no profit basis, and the money collected by the assessee as advertisement charges from members should not be classed as income. It is undisputed, as we have already noticed, that the assessee is a mutual association.
The principle of mutuality is based on the theory that a person cannot make profit out of himself, and, similarly, a mutual association cannot make profit out of itself. The principle, however, does not prevent such an association from doing business with some of its members because, in that case, the association must be deemed to be doing business not with itself but with others who are different entities. It is also well settled that, in order that the principle of mutuality should come into play, there must be an identity between the contributors to the fund and the participators in the fund. The essence of mutuality lies in the return of what one has contributed to the common fund (vide Commissioner of Income-tax v. Kumbakonam Mutual Benefit Fund Ltd. 1).
The principle that no one can make a profit out of himself, may, in its application, easily lead to confusion. In the case of Commissioner of Income-tax v. Royal Western India Turf Club Ltd., the Supreme Court was pleased to notice the room for such confusion and clarified the position with the following observation :
'There is nothing per se to prevent a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does not come back to them as persons who had contributed them. Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases 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. But it cannot be said that, incorporation, which brings into being a legal entity separate from its constituent members, is to be disregarded always and that the legal entity can never make a profit out of its own members.'
Mr. Banerjee submitted that cent. per cent. indentity between the contributors and participators was not necessary. In the instant case, he submitted all members had the right to advertise in the magazine; the fact that only some of them exercised the right or availed of the privilege would not make any difference and the money collected from advertisement charges by the assessee, a mutual concern, in furtherance of the object of the association, would not become business income. In making the above submission Mr. Banerjee strongly relied upon a judgement of the Madras High Court in Kumbakonam Mutual Benefit Fund Ltd. v. Commissioner of Income-tax. In that case,
'the object of the assessee, Mutual Benefit Fund, inter alia, was to enable its shareholders to save money, to invest the shareholders savings in a prescribed manner, to advance loans at favourable interest, to receive deposits and to borrow if need be. Article 5 of the articles of association of the assessee laid down that it shall have dealings only with its shareholders. The assessee was authorised to receive deposits of money only from the shareholders. Loans of different kinds could be granted by the assessee but only shareholders were eligible for taking loans. Article 100 provided how the net profits of the assessee had to be dealt with : 20 per cent. of the profits had to be set apart for depreciation of properties and securities, 5 per cent. for short realisations and 5 per cent. for a building fund. The balance of 60 per cent. of the net profits was to be divided among the shareholders as dividend not exceeding 9 per cent. on the amount of the shares and the balance, if any, had to be appropriated to such fund as the directors though fit.
The question was whether the profit earned by the assessee from the transactions with its shareholders was exempt from tax'.
The Madras High Court answered the question in favour of the assessee and in the course of their judgement that court observed :
'What is accordingly required is that both the right to contribute and the right to participate must be available to an identical body, an it is not necessary that every member should contribute before he can be allowed to participate. That this test is also satisfied in the present case is beyond question.'
Unknown to Mr. Banerjee, until the same was pointed out to him by the learned counsel for the revenue, was that the decision of the Madras Hight Court in Kumbakonam Mutual Benefit Fund Ltd. had been reversed by the Supreme Court in appeal, which decision is reported in Commissioner of Income-tax v. Kumbakonam Mutual Benefit Fund Ltd. In that case the Supreme Court observed :
'It seems to us that the test applied by the High Court is not sound. It is not consistent with the true decision in Styles case, as understood by this court and in other subsequent cases. It will be noticed that Lord Macmillan clearly said that all participators must be contributors to the common fund and not that all participators must be entitled to contribute. The essence of mutuality lies in the return of what one has contributed to a common fund.'
The following statement of law on the point in Thomas v. Richard Evans & Co., was approved of by the Supreme Court in Kumbakonam Mutual Benefit Fund Ltd. as the correct statement :
'But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a railway company makes a profit by carrying its shareholders, or if a trading company, by trading with shareholders - even if it is limited to trading with them - makes a profit, that profit belongs to the shareholders, in a sense, but it belongs to them qua shareholders. It does not come back to them as purchasers or customers. It comes back to them as shareholders upon their shares. Where all that a company does is to collect money from a certain number of people - it does not matter whether they are called members of the company, or participating policy holders - and apply it for the benefit of those same people not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case, there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders but in the character of those who have paid it.'
If we apply the above test to the facts of the present case, we find that the assessee Association was accepting money from some of its members by way of advertisement charges and was making a profit out of it. The profit went to increase the funds of the assessee and benefit out of the same came to the members qua members but not qua contributors or advertisers. Since money, was collected by the assessee Association, by way of advertisement charges, from a certain number of members but the profit made thereout was not distributed amongst them as advertisers, there was absence of mutuality. This made the profit the income of the assessee Association and taxable as such. In the view that we take we answer question No. 1, as reframed by us, in the affirmative and against the assessee Association.
We now turn to answer the second question. People advertise in a journal or magazine because of the popularity of the journal or magazine. The belief seems to be that the journal or magazine, because of its popularity, will be read by many and the eyes of the readers will not fail to notice advertisements published therein. The magazine is the peg from which hang the advertisements. Unless a magazine with good circulation can be produced there will be little inducement for advertisers to seek publication of advertisements therein. Thus, to earn advertisement income, it is essential to produce the magazine. Now, the revenue apportioned the costs of production of the magazine portion and the advertisement portion of the journal and allocated 35 per cent. of the total cost as the cost for production of the magazine. It is not the case of the assessee Association that the allocation was inadequate. The claim is that the entire cost of production of the magazine (inclusive of the journal and advertisement portion) should have been set off against advertisement receipts. In our opinion, the cost of production of the journal portion has an intimate nexus with the cost of production of the advertisement portion. The two are inseparable. To say that the income from advertisement could be earned with 35 per cent. of the total cost of production of the journal is to say unrealistically. The body of the journal had to be produced so as to attract advertisements. The cost of production of the journal portion of the magazine was thus the expenditure incurred for earning the advertisement income. The whole of this cost should be set off against the advertisement income. In the view that we take we answer question no. 2 in the affirmative and in favour of the assessee.
In view of the divided success, we make no order as to costs.
MASUD J. - I agree.