(a) Income Tax Ordinance (XXXI of 1979)---

----S.14(2) & Second Sched., Part I, Cl(103)---S.R.O. 1081(1)/93, dated 1-11-1993--- Exemption---Assessee, a Cooperative Society registered under the Cooperative Societies Act, 1925---Transfer fee received from members of society and non-members was taxed by Assessing Officer for the Assessment years 1995-96 and 1996-97, was challenged--- Clause (103) of Second Sched., Part I, Income Tax Ordinance. 1979, granting exemption had been omitted by Notification No.S.R.O. 1081(1)/93, dated 1-11-1993-- Proviso to the notification provided that existing beneficiaries to which Cl.(103) of Second Sched., to the Income Tax Ordinance, 1979 applied, shall continue to get benefit of exemption until period stipulated in the clause had expired---Plea that benefit of exemption shall continue till eternity as no period had been provided in said Cl.(103) was repelled by Appellate Tribunal holding that if such plea was accepted same would amount to do violence to the provisions contained in subsection (2) of S.14 of the Income Tax Ordinance, 1979.

English and Scottish Joint Cooperative Wholesales Society Ltd v. Commissioner of Agricultural Income-tax, Asaam (1948) 16 ITR 270 (PC); C.I.T., Bombay City v. Royal Western India Turf Club Ltd. (1953) 24 ITR 551 (SC of India); C.I.T., West Bengal v. Calcutta Stock Exchange Association Ltd. (1959) 36 ITR 222 (SC of India); Delhi Stock Exchange Association Ltd. v. C.I.T., Delhi (1961) 41 ITR 495; Royal Western India Turf Club Ltd. v. C.I.T., Bombay City. (1970) 78 ITR 548: C.I.T. v. Madras Race Club (1976) 105 ITR 433; Jamshedpur Cooperative Stores Ltd v. C.I.T. (1986) 157 ITR 127 and Bihar Rajya Sikshat Sahyog Sangh Ltd. v. C I.T. (1987) 165 ITR 681 distinguished.

(b) Interpretation of statutes-----

---- No provision of a statute is to be interpreted in such a way which may render other provisions as nugatory or redundant.

(c) Income Tax Ordinance (XXXI of 1979)---

----S. 14---Exemption--S.R.O. 1081(1)/93, dated 1-11-1993---Doctrine of mutuality ---Application---Cooperative Society received transfer fee from members and non-members and claimed exemption on the basis of doctrine of mutuality---Receipt was taxed by the Assessing Officer---Validity---Held, income derived by the societies from their members as well as non-members was/were not exempt from tax on the basis of doctrine of mutuality having no complete identity between the contributors and the recipients.

(d) Income-tax---

----Bisection of income, concept of---Doctrine of mutuality ---Availability-- With the taxability of income earned from non-members, the concept of mutuality is destroyed and, thus, concept of bisection of income for the purpose of availing the doctrine of mutuality is not available.

(e) Income Tax Ordinance (XXXI of 1979)---

----S. 14(2) & Second Sched., Cl.(103)---S.R.O. No.1081(1)/93, dated 1-11-1993---Cooperative Societies Act (VII of 1925), S.33---Power of exemption from income-tax, stamp duty, registration and court-fee-- Doctrine of mutuality--- Application--- Cooperative Society claimed exemption from income-tax on the ground of doctrine of mutuality---No exemption was envisaged except when specifically granted by the Federal Government---Doctrine of mutuality, held, was not available to Cooperative Societies Act, 1925.

Muhammad Farid for Appellant.

Misri Ladhani, D.R. for Respondent.

ORDER

MUHAMMAD MUJIBULLAH SIDDIQUI (CHAIRMAN).---The above appeals at the instance of assessee are directed against the order, dated 31-5-1997 by the learned C.I.T.(A), Zone-VI, Karachi in I.T.A. No.55 and 56/A-VI, relating to the assessment years 1995-96 and 1996-97.

2. The appellant is a cooperative society registered under the Cooperative Societies Act, 1925. The society has been formed with the object to carry on the trade of building and selling of houses and of buying, selling, hiring, letting and developing land in accordance with the cooperative principles and to establish and carry on social re-creative and educational work in connection with its tenants. In this behalf the society under its bye laws has full power to do all things being necessary or expedient for the accomplishment of society's objects including the powers to purchase, hold, sell, exchange, mortgage, rent, lease, sub-lease, surrender, accept surrenders of and deal with the lands and building of any tenure and to sell by instalments and object to any terms or conditions and to make and guarantee advances to Members for building or purchasing property and to erect, pull down, repair, alter or otherwise deal with any building thereon. In pursuance of the above objects the society acquired land in Gulshan-e-Iqbal. Karachi and allotted the same to its Members. With the passage of time some of the Members of the society/original allottees transferred their plots to non- members also and thus, the society has been earning fee under various heads from members of the society as well as non-members. In the assessment year 1995-96 the appellant society declared total income of Rs.27,47,404. The net profit as per income and expenditure account was declared at Rs.49,16,623. It included profit from bank at Rs.24,10,101 which was subjected to withholding taxes at Rs.2,40,881. After adding the amount of withholding taxes the profit was worked out at Rs.51,57,505. The Assessing Officer assessed the total income for the assessment year 1995-96 at Rs.28,04,379. In the assessment year 1996-97 total income was declared at nil. The Assessing Officer assessed the total income at Rs.26,61,506.

3. The appellant assailed the assessment orders and claimed exemption on two grounds. First, that the cooperative societies were enjoying exemption in respect of its incomes, profits and gains as is derived by it as a result of its dealings with its members involving sales of goods for the personal use of such members under clause (103) of the Second Schedule part 1 of the Income Tax Ordinance, 1979. The above clause was omitted by Notification No.S.R.O. 1081(1)/93, dated November 1, 1993 with a proviso that the existing beneficiaries to which the aforesaid clause apply shall continue to get the benefit of exemption until the period stipulated therein has expired. A plea was taken on behalf of assessee that no period was provided in clause (103) of the Second Schedule to the Income Tax Ordinance, 1979 and, therefore, the benefit shall continue till eternity. The second contention was raised that if the exemption is not allowed by virtue of the above proviso the income from dealings with the members should be allowed exemption on the doctrine of mutuality. The learned C.I.T.(A) did not accept any of the contentions and held that no exemption shall available to the appellant and the entire income was subjected to the levy of income- tax.

4. Being aggrieved with the above finding the appellant has preferred these appeals agitating the same contentions.

5. We have heard Mr. Muhammad Farid, Advocate, learned counsel for the appellant and Mr. Misri Ladhani, learned representative for the department. We do not find any substance in the first contention that by virtue of the proviso while omitting clause (103) the benefit available to the appellant shall continue till eternity because no period was stipulated in the clause (103) of the Second Schedule. The reason being that the proviso was applicable if any period was stipulated as is the case in respect of various exemptions under Second Schedule in which the period of exemption is specified. It is admitted position that no period was specified in clause (103) and, therefore, the proviso is not attracted at all. The second reason being that the contention is absolutely against the principles of interpretation of statutes. It is established principle of the interpretation of statutes that no provision in any statute is to be interpreted in such a way which may render other provisions as nugatory or redundant. The attention of Mr. Muhammad Farid was invited to the provisions contained in subsection (2) of section 14 to the effect that the Federal Government may from time to time by notification in the official gazette make such amendment in the Second Schedule by adding any clause or condition therein, omitting any clause or condition thereon and making any change in any clause or condition therein, as it may think fit and all such amendments shall have effect in respect of such year beginning on any date before or after the commencement of the financial year in which the said notification is issued. Thus, if the contention of Mr. Muhammad Farid is accepted that notwithstanding omission of clause (103) its benefits shall continue till eternity it would amount to dong violence to the provision contained in subsection (2) of section 14 which is not possible. The contention is, therefore, repelled.

6. This brings us to the second leg of arguments that after the omission of clause (103) of Second Schedule to the Income-tax Ordinance, exemption is available to the appellant a cooperative society, under the doctrine of mutuality. It was contended before the learned C.1.T.(A) that interest income of the cooperative society was taxable only and all other income enjoyed exemption. When confronted with the fact that in addition to interest income the appellant was deriving income out of dealings with the members and non -members both, Mr. Muhammad Farid conceded that the income derived out of dealing with the non-members was taxable and thus, confined his arguments to the income derived from dealing with its members only. It has been reiterated on behalf of appellant that the exemption was available on the basis of case-law starting from New York Life Insurance v. Styles. Mr. Muhammad Farid has not produced any judgment before us in support of contention that cooperative society was entitled to exemption on the basis of doctrine of mutuality. We were also not able to lay hand on any case-law in this behalf from Pakistan jurisdiction. However, we have been able to lay hand on the following cases from Indian jurisdiction wherein it has been held that the principle of Styles case is not applicable where the cardinal requirement that all the contributors to the common fund must be entitled to participate in the surplus and all the participators in the surplus must be contributors to the common fund is not satisfied. It has been held in the cases which shall be presently referred that there must be complete identity between the contributors and the participators.

(i) The English and Scottish Joint Cooperative Wholesales Society Ltd. v. Commissioner of Agricultural Income-tax, Asaam, (1948) 16 ITR 270 (PC). (ii) C.I.T. Bombay City v. Royal Western India Turf Club Ltd. (1953) 24 ITR 551 (SC of India).

(iii) C.I.T. West Bengal v. Calcutta Stock Exchange Association Ltd ' "~ ~' (1959) 36 ITR 222 (SC of India).

(iv)Delhi Stock Exchange Association Ltd. v. C.I.T. Delhi (1961) 41 ITR 495.

(v)Royal Western India Turf Club Ltd. v. C.I.T. Bombay City. (1970) 78 ITR 548.

(vi) C.I.T. v. Madras Race Club (1976) 105 ITR 433.

(vii) Jamshedpur Cooperative Stores Ltd. v. C.I.T. (1986) 157 ITR 127.

(viii)Bihar Rajya Sikshat Sahyog Sangh Ltd. v. C.I.T. (1987) 165 ITR 681.

7. It has been held by the Supreme Court of India in the case of Royal Western India Turf Club that the principles of Styles case cannot apply to an incorporated company which carries on the business of Horse racing and realises money both from members and non-members for the same consideration, namely, by the giving of same or similar facilities to all alike in course of one and the same business carried on by it. In the case of Delhi Stock Exchange Association the Supreme Court of India has held that as the body of the trading members who paid the entrance fees and the shareholders among whom the profits of the company were distributed were not identical and the element of mutuality was lacking, the company carried on the business whose profits were taxable, therefore, the admission fee received from members were also taxable in its hands. The Bombay High Court has held in the case of Royal India Turf Club (1970) 78 ITR 548 that there should be four principles which must be satisfied cumulatively before an activity can be properly considered as a mutual dealing or an activity of mutual benefit. There must be mutual dealing inter se between the members and not with the club. There may be common fund to which everyone must contribute, and all those who contribute must participate to the benefit of the company. The surplus that may remain must be actually distributed to the contributors, and it is not enough that the contributors have a right to such surplus. The Patna High Court has held iii the case of Jamshedpur Cooperative Stores (1986) 157 ITR 127 that the essence of mutuality lies in the return of what one has contributed to common fund and if there is lack of complete identity between the contributors and participators in the common fund, the principle of mutuality is not attracted. It was further held that in the facts of the case in which profits arising out of dealings between the society and its members were added to the total income of the assessee and the assessee claimed that these profits should be exempt on the basis of mutuality, the exemption was not available. It was further held that it was not in controversy that members as well as non-members were buying from the cooperative society shops, it meant that the contribution to the fund were of members as well as of non-members while dividends on shares were to be distributed to the members only, there was no common fund. Thus, the profit derived by the assessee from sales to its members were liable to be added to its total income. Again it has been held by Patna High Court in the judgment reported as (1987) 165 ITR 681 that the plea that the activities between the society and members and between the society and non-members should be treated differently was not acceptable. The plea for bisecting income earned from members and the income earned from non-members was also not accepted. It was held that once mutuality is lost, the whole income becomes liable to tax. It was further held by the Patna High Court that if the doctrine of mutuality is not available for the reason that assessee had indulged in trading activities with all and sundry, the benefit flowing from the principle of mutuality cannot be accorded to the assessee in a limited field and, therefore, the plea for bisecting the income in taxable and non-taxable categories was not accepted. Reliance in this behalf was placed by the Patna High Court on the judgment of Supreme Court of India reported as (1953) 24 ITR 551 and (1964) 53 ITR 241. A perusal of the written arguments submitted before the learned C.I.T. (A) incorporated in the impugned order shows that the plea was taken that under the general principles of law, income of cooperative societies derived by them from their members is exempt from the tax provided there is a complete identity between the contributors and the recipients. Now applying the above principle as explained in the judgments from Indian jurisdiction we find that in the present case the complete identity in the contributors and recipients of profit is lacking. It is admitted position that the appellant society is deriving income from interest which even according to them does not enjoy exemption. It is further admitted position that the society is deriving income from members and non-members. The provision for profits contained in Article XVII of the bye laws of appellant society is as under:

After providing for the interest upon any loans and deposits and for placing to the credit of a sinking fund a sum representing 1/2 per cent per annum on the total cost of the Society's Buildings, 10 per cent of the net profits of all business carried on by or on account of the Society shall be placed at the credit of a Reserve Fund.

62. The remaining 90 per cent shall be employed as follows in order viz:--

(1)In paying a dividend not exceeding 6-1 /4 per cent per annum upon the paid up share capital on such days as the Board may direct.

(2)In allocating such part of the profits as the Annual General Meeting on the recommendations of the Board may determine to a common fund for social, re-creative and educational purposes.

(3)In allocating such part of the profits as the Annual General Meeting on the recommendations of the Board may determine to the tenants who are members of the Society as a dividend on the amount of rent paid by them respectively during the year. Such dividend shall be added to capital and placed to the credit of the member's share account until his shares amount to Rs.10,000 and thereafter, to the credit of the Member's loan Stock Account and if the member has no Loan Stock Account, as Loan Account shall be opened for him and the rate of interest thereon determined by the Board.

(4)The balance (if any) shall be carried or dealt with as the annual General Meeting on the recommendation of the Board may determine.

63. Dividend on shares transferred-Dividend on shares shall be paid to the registered holder of such shares according to the books of Society on the last day of the year.

64. No interest or dividend shall be paid to any member who has defaulted for more than a month in any payment to the Society after written notice given to such member requiring payment and such interest and dividend shall be the property of the Society,

65. Indivisibility of the Reserve. The Reserve Fund of the Society shall be indivisible so that in the event of the dissolution of the Society no member shall have any claim over it, but the fund, after meeting any charges, that may then be certified by the registrar to exist against it shall be devoted to such object of general utility as may be determined by General Meeting convened for that purpose as may be approved by the Registrar. The Society shall have full powers to employ the assets constituting the Reserve Fund in the business of the Society and that without being bound to keep the same separate from the other assets. .

8. A perusal of the above provision in the bye-laws of the appellant society shows that no profits are to be distributed to the non-members and as such the necessary ingredients of the complete identity between the contributors and the recipients is lacking and moreover with the taxability of income earned from non-members the concept of mutuality is destroyed and, once the concept of mutuality is destroyed it is extinguished in totality and not in part only. As already discussed above the concept of bisection of income for the purpose of availing the doctrine of mutuality is not available.

9. For the foregoing reasons it is held that the learned C.I.T.(A) has rightly refused to allow exemption on the doctrine of mutuality. The impugned finding of learned C.I.T.(A) is hereby maintained.

10. There is another reason on which the exemption cannot be allowed to the appellant. Mr. Muhammad Farid has contended before us that with the omission of clause (103) from the Second Schedule to the Income Tax Ordinance, 19.79 the doctrine of mutuality stands revived. It means that prior to the allowing of exemption the income of cooperative society derived out of dealing with the members enjoyed exemption under the doctrine of mutuality. However, a perusal of Cooperative Societies Act, 1925 under which the appellant society is registered shows that the contention is misconceived. A perusal of the appellant's society's bye laws shows that it was registered under the Bombay Cooperative Societies Act, 1925. It is provided in section 72 of the Cooperative Societies Act, 1925 that the Cooperative Societies Act, 1912 and the Bombay Cooperative Societies Act, 1925 as applicable to the District of Karachi stands repealed. It is further provided that all the existing societies shall be deemed to be registered under the Societies Registration Act, 1925. Thus, all the provisions of Societies Registration Act, 1925 are applicable to the appellant. It is provided in section 33 of the Cooperative Societies Act, 1925 as follows:

"The Federal Government, by notification in the official gazette may in the case of any society or class of society remit the income -tax or super tax payable in respect of the profits of the society, or of the dividends or other payments received by the members of the society on account of profits or in respect of interest or return on securities held by the society."

11. The above provision clearly indicates that exemption from income- tax or super tax in respect of the profit of the society registered under the Cooperative Societies Act, 1925 is not envisaged until and unless the Federal Government by notification in the official gazette remits the same. Profits of the cooperative societies were remitted by the Federal Government from time to time. The exemption granted by the Federal Government from time to time has been referred by Mr. Muhammad Farid in the written arguments submitted before the learned C.I.T.(A). Such exemption was contained in clause (103) of the Second Schedule, part I of the Income-tax Ordinance also. With the omission of above clause now no such exemption granted by the Federal Government has been brought to our notice and, thus, we are of the considered opinion that under the provisions of Cooperative Societies Act, 1925 under which the appellant society is registered, no exemption is envisaged except when specifically granted by the Federal Government. No doctrine of mutuality is recognised in Cooperative Societies Act, 1925. The reason is very much apparent on further examination of the various provisions contained in the Cooperative Societies Act, 1925. It is provided in section 36 that, "consumers, producers and housing societies may to the extent permitted by their laws trade with persons who are not members." So far the distribution of profits is concerned it is provided in section 38 that no society shall pay a dividend to its members at a rate exceeding 10%. It is further provided in section 39 that every society which does or can derive a profit from its transactions shall maintain a reserve fund. It is further provided in section 40 that, "subject to the provisions of section 38 the balance of the profits of the society after making the prescribed provision that the reserve fund may, together with any available profits of the past years be distributed among its members." The consumers and producers society can distribute profits among persons who are not members but the housing societies are not permitted to do so. It is further provided in section 41 that a society may establish a provident fund for its members out of the contribution from such members in accordance with the bye laws made by the society in this behalf and may contribute to such provident fund from its net profit, after the prescribed payments have been made to the reserve fund. The object of the provident fund is generally to provide their employees on the retirement or death their dependents fairly a large sum of money. Under section 26 of the Cooperative Societies Act, 1925 protection has been given to the provident fund established under section 41, which shall not be liable to attachment of sale under any decree or order of a Court of justice in respect of any debt or liability incurred by any member. Thus, it is seen that the society can earn profit from various transactions/dealings and the profit is to be distributed by way of dividend to its members, by maintaining a reserve fund, by distributing to its members and by contributing to the provident fund as well as contribution to charitable purpose under section 42 of the Cooperative Societies Act. The result is that the complete identity of the contributors and recipient is totally lacking with the result that the mutuality itself is lacking and thus, the exemption on the doctrine of mutuality is not available at all to the appellant cooperative society.

12. For the foregoing reasons the claim for exemption on the doctrine of mutuality is not available to the appellant cooperative society. No other objection is pressed.

13. Both the appeals stand dismissed accordingly.

C.M.A./559/Trib. Appeals dismissed.