Income-tax---

----Income---Accrual of income---Principle of mutuality---Association of cement manufacturers--Object of association was to ensure proper supply of cement to consumers on decontrol of cement---Members of association contributing to common fund and having right to participate in any surplus--- Principle of mutuality applied--Surplus was not assessable as income-- Indian Income Tax Act, 1961.

The cardinal principle to apply the test of mutuality is that all the contributors to the common fund are also entitled to participate in the surplus and that all participators in the surplus must be contributors to the common fund. In other words, there must be complete identity between the contributors and participators.

In December, 1965, the scheme of decontrol of cement came to be formulated. The object of the scheme was to enable a smooth change over from control to decontrol and to ensure that prices did not shoot up on decontrol. Accordingly, the Cement Manufacturers Association formed a central organization to take over the cement distribution functions. The object of the scheme to assure that supplies of cement to Consumers would continue uninterrupted. The association was a "no-profit-no-loss" organization. The freight pool of the organization was to be used for ensuring equal distribution of cement throughout the country by transporting cement over longer distances from surplus arrears to deficit arrears. Cement producers whose outward freight was low contributed to the freight pool so that such contributions could be utilised to subsidise higher freight for transporting cement to consumers at longer destinations. The pooling arrangement was mainly with the object of supplying cement to consumers at a uniform f.o.r. price. Under the scheme, the organization was given a licence. The members-producers would sell cement and supply cement to all. destinations throughout India on a uniform f.o.r. destination price to be realised by them and the members agreed to authorise the organization to fix a uniform f.o.r. destination price. Opt of the uniform f.o.r. destination price realised by each member, it would retain an aggregate of certain specified heads and pass on the balance to the assessee-organization. Out of the moneys contributed by member-producers under the surplus heads, losses were reimbursed to member-producers under deficit heads. The common fund of the assessee-organization fell under four accounts, namely, (1) Retention Price Adjustment Account, (2) D. G. S. and D. Public Supplies Account, (3) Freight Adjustment Account, (4) Oil Firing Adjustment Account. This was with a view to equalize the burden of various member producers under various, heads. Every member of the assessee-organization contributed to this -common fund under some head or the other and all participators in the benefit were contributories to the common fund. The Income-tax Officer held that the assessee-organisation in its transactions with its members derived income which was taxable- in its entirety. The Appellate Assistant Commissioner and the Tribunal, however, held that it was not assessable. On a reference.

Held, that in the present case, contributions were made by the members to the common fund and the contributors who were required to contribute to the fund were entitled as a matter of right to receive the distribution of the balance surplus on pro rata basis of despatches. The working of the scheme clearly indicated that the contributors contributed more than what was required and in the circumstances the distribution of the balance surplus was only apportionment of the savings amongst, contributors. The scheme and the record clearly indicated that the savings left over after meeting the establishment expenses of the organization and or outgoings were credited back to the member's account on proportionate despatch basis. There was a complete identity between the contributors to the common fund and the participators in the benefit arising out of the common fund. The principle of mutuality applied: The surplus did not constitute the profits of the assessee and was not assessable

CIT v. Bombay Oilseeds and Oil Exchange Ltd. (1993) 202 ITR 198 (Bom.) ref.

R. V. Desai with B. M. Chatterjee for the Commissioner.

S. J. Mehta for the Assessee.

JUDGMENT

S. H. KAPADIA, J.---At the instance of the Department, the Tribunal referred the following questions, for the opinion of this Court for the assessment years 1967-68 and 1968-69 under section 256(1) of the Income Tax Act, 1961:---

"(1) Whether, the assessee-organisation derived profits and gains of business of Rs.94,77,142 for assessment year 1967-68 and Rs.8,75,000 for the assessment year 1968-69 chargeable to tax under section 28 of the Income Tax Act, 1961?

(2) Whether the principle of mutuality, as enunciated in Styles case was satisfied in the assessee's transactions with its members and the savings were not chargeable to tax on the ground of mutuality?

(3) Whether assessee-organisation in its transactions with its members derived any income chargeable to tax under the Income Tax Act, 1961?"

The assessee was an association registered under the Companies Act, 1956. It was registered under section 25(1)

of the Companies Act, 1956. It was registered to act as a central coordinating organisation for distribution of cement at a uniform f.o.r. destination price during the period when cement was decontrolled by the Government of India. The organisation was incorporated as a company limited by guarantee on May 18, 1965. On August 26, 1965, the Prime Minister of India made an announcement in Parliament that the Government had decided, in principle to decontrol cement. On December 13, 1965, the scheme of decontrol of cement came to be formulated. The object of the said scheme was to enable smooth change over from control to decontrol and to ensure that prices did not shoot up on decontrol. Accordingly, the Cement Manufacturers Association formed a central organisation to ,take over the cement distribution functions. The object of said scheme was to assure that supplies of cement to consumers would continue uninterrupted. Under the said scheme, the assessee organisation was a no profit no loss organisation. Under the said scheme, the freight pool of the organisation was to be used for ensuring equal distribution of cement throughout the country by transporting cement over longer distances from surplus areas to deficit areas. Under the scheme, cement producers whose outward freight was low contributed to the freight pool so that such contributions could be utilised to subsidise higher freight for transporting cement to consumers at longer destinations. The pooling arrangement was mainly with the object of supplying cement to consumers at a uniform f.o.r. Under the said scheme, the organisation was given a licence on April 29, 1966. One of the objects of the organisation was to control, promote and regulate the equal distribution of cement at fair prices. Under the said scheme, the member-producers would sell cement and supply cement to all destinations throughout India on a uniform f:o:r. destination price to be realised by them and the members agreed to authorise the organisation to .fix a uniform f.o.r. destination price. Out of the uniform f.o.r: destination price realised by each member, it would ,retain ad aggregate of certain specified heads and pass on the balance to the assessee-organisation. Out of the moneys contributed by member-producers under the surplus heads, losses were reimbursed to member-producers under deficit heads. The common fund of the assessee-organisation fell under four accounts, namely, (1) Retention Price Adjustment Account (2) D.G. S. and D.--:-Public Supplies Account, (3) Freight Adjustment Account, and (4) Oil Firing Adjustment Account. This was with a view to equalise the burden of various member, producers under various heads. Every member of assessee-organisation contributed to this common fund under some head or the and all participators in the benefit were contributories to the common fund. Under clause 37 of the scheme, it was, inter alia, provided that if any surplus, after reimbursing deficits, .remains then the expenses of the organisation were required to be set off against such surplus. In the event of there being no surplus, the members agreed to reimburse the deficit of the organisation is proportion to the despatches of each member. However that contingency did not arise as certain surplus remained even- after set off of the organisation expenses. This was because the surplus consisted of the difference between the uniform destination price and total amount retained by each member as retention price. On the facts it has been found by the Accountant Member of the Tribunal that each member-producers contributed snore than what was required to be contributed, and the surplus came to be generated accordingly. After set off of organisational expenses the members were entitled to the return of the balance surplus. However, they authorised the President of the assessee-organisation to retain a part of the balance surplus with the President for discretionary expenditure like contributions to political parties, advertisements and publicity of certain types of cement, etc. This was done by debiting the individual accounts of the members pro-rata on the basis of despatches and on the basis of the share of each member. Under the scheme, therefore, it cannot be said .that the disbursements were made out of the profits of the assessee-organisation but the said disbursements. were made out of the members' own funds by debiting their individual accounts in the books of the assessee-organisation.

In the light of the above scheme, the main issue which arises for consideration is: whether the assessee-organisation derived any income chargeable to tax under the Income Tax Act, 1961?

To complete the chronology of events, it may be mentioned that the Income-tax Officer held that the assessee-organisation in its transactions with its members derived income which was taxable in its entirety. He came to conclusion that the assessee-organisation was not an organisation for public benefit but it was established for the benefit of its members. Being aggrieved by the decision of the Income-tax Officer the matter was carried by the assessee in appeal to the Appellate Commissioner of Income-tax. The Appellate Assistant Commissioner agreed with the Income-tax Officer that the objects of the assessee did not constitute charitable purposes within the meaning of section 2(15) of the Income-tax Act. However, the Appellate Assistant Commissioner examined the scheme referred to hereinabove in detail and came to the conclusion that the amounts received by the assessee did not constitute income. He came to the conclusion that the character of the receipt did not constitute receipt of income. The Appellate Assistant Commissioner also found on the facts that out of total receipts, certain expenses of the organisation came to be set off and after keeping a certain specified amount to be utilised by the President placed at his disposal pursuant to the resolutions passed by the assessee from time to time, the balance amount came to be distributed amongst the various members in the ratio of their despatches. Accordingly, the Appellate Assistant Commissioner accepted the appeal preferred by the assessee-organisation. Being aggrieved by the order of the Appellate Assistant- Commissioner the matter was carried in appeal to the Tribunal by the Department. Before the Tribunal, there was a difference of opinion between the learned Accountant Member and the Judicial Member of the Tribunal. The learned Accountant Member, after examining the scheme, upheld the contentions advanced by the assessee and came to the conclusion that each member producer was required to contribute to the common fund; that there was a complete identity between the, contributors to the common fund and the participators in the benefit out of the common fund and, therefore, the principle of mutuality stood attracted. However, the learned Judicial Member did not. agree with the opinion expressed by the learned Accountant Member. The learned Judicial Member came to the conclusion on examination of the above scheme that under clause 4 of the memorandum of association, income of assessee-organisation was required to be applied only towards promotion of the objects of the organisation; that the memorandum prohibited organisation from paying or transferring the income of the assessee to any of its members; that the surplus represented profits accruing to the organisation and, therefore, the act of the assessee-organisation in returning the surplus to the members amounted to returning the surplus profits to the members and, in the circumstances, the learned Judicial Member came to the conclusion, inter alia, that the principle of mutuality was not attracted. He further came to the conclusion that the amounts placed with the President for discretionary expenditure did not represent the contributions of the members. That it was distribution of profits. In circumstances, the learned Judicial Member came to the conclusion that profits accrued to the assessee for the assessment years 1967-68 and 1968-69. The matter was, thereafter, referred to the Third Member who vide his judgment and order, dated June 30, 1978, agreed with the view expressed by the learned Accountant Member. Accordingly, on the basis of the majority judgment, the appeal preferred by the Department came to be dismissed. Accordingly, the statement of case was drawn up on September 17, 1979, and the above questions were referred to this Court for opinion.

Learned counsel for the Department took us through the proceedings in the matter. He contended that, in the present matter, the above scheme clearly indicates that although the assessee did not purchase cement from the member-producers, the contributions made by each member to the organisation show that large income from the above adjustment account accrued to the assessee. That under the scheme, the assessee was required to reimburse oil firing adjustment account and other small accounts as against the other adjustment account, namely, D: G. S. and D. Account. Learned counsel for Department further contended that the income came to be realised by the assessee in the form of contributions from the members. He further contended that the amounts placed with the President for discretionary expenditure did not constitute contributions of the members but they represented surplus of the assessee-organisation and that the members of the organisation had nothing to do with it. He further contended that the surplus did not belong to the members but, it belonged to the assessee organisation. He further contended that there was no complete identity between the contributories to the fund, and the participators in the benefit arising out of the common fund. He further contended that the Government had decided to decontrol the cement on certain conditions. He further contended that assessee-organisation was formed on the lines of the State Trading Corporation to take over the entire production-of cement in India for distribution. That individual-producers were entitled only to have retention prices and, in the circumstances, the transactions between the assessee organisation on the one hand and the members on the other hand show that the income chargeable to tax under the Income-tax Act, had accrued to the assessee-organisation. In the circumstances, he contended that the principle of mutuality did not apply to the present case.

In the present matter, the above scheme indicates that the Government had issued the licence on footing that the assessee-organization was a no profit no loss organization. That the freight pool of the assessee was to be used for even distribution of cement throughout the country by transporting cement over long distances from surplus to deficit areas. The cement producers whose outward freight was low, contributed to the freight pool so that their contributions could be used to subsidize higher freight incurred by other producers who were required to transport the cement to longer destinations. The said pool was in the nature of freight equalization pool. The surplus under one adjustment account was required to be: set off against the deficit under the other head. The object was to equalize the destination price. In the present case, contributions were made by the members to the common fund and the contributors who were required to contribute to the fund were only entitled as a matter or right to receive the distribution of the balance surplus on a pro-rata basis of despatches. The working of the scheme clearly indicates that the contributors contributed more than what was required and in the circumstances the distribution of the balance surplus was only apportionment of the savings amongst the contributors. Therefore, out of the moneys contributed by each member under surplus heads, losses were reimbursed to each member under deficit heads and what remained was merely savings of its members. The said savings arose after meeting establishment expenses of the organization and other outgoings and, in the circumstances, income did not accrue to the assessee-organisation. As regards the discretionary fund with the president, the scheme and record clearly indicates that the savings left over after meeting the establishment expenses of the organization and or outgoings were credited back to the member's account on proportionate despatch basis. This was general pattern of the working of the assessee-organization. Under the above circumstances, the principle of mutuality stood attracted to the facts of the present case and there was a complete identity. between the contributors to common fund and the participators in the benefit arising out of the common fund. In the case of CIT v. Bombay Oilseeds and Oil Exchange Ltd. (1993) 202 ITR 198 (Bom.), the assessee ran an exchange for transacting business in oil and oil seeds. Under its bye-laws, the exchange was entitled to charge on each transaction of sale certain amount of cess known as "lagas". In general meeting of the members of the exchange it was resolved that certain amount of laga received by the exchange be credited to reserve fund of the exchange, and that certain amount be credited to Shubhkam Fund. The assessee was a company. Till January 9, 1963, there was. only one category of. membership. There was no category of associate member during the assessment year 1963-64. In the assessment years 1964-65 and 1965-66, there was neither any associate member nor special associate 'member. The assessee claimed that the laga receipt did not constitute its income on the principle of mutuality.. On a reference, it was contended by the assessee that the principle of mutuality was attract. It was contended that object of the resolution of the exchange empowering company to apply certain percentage of the, laga receipts to the Shubhkam fund and the reserve fund did not attract the diversion of income by overriding title but it was only the case of application of laga receipts. That all the members of the assessee had contributed to the laga fund and all participators to the benefit of the fund were also members of the exchange and, therefore, the test of mutuality was satisfied with regard to the laga receipts. On the other hand, the Department contended that there was nothing to indicate that all the members were participators of the benefit accruing to the fund. It was contended by the Department that there was no complete identity between the contributors and the participators in the benefit of the common fund. After examining the scheme, the Division Bench of this Court laid down that the cardinal principle to apply the test of mutuality was that all the contributors to the common fund were also entitled to participate in the surplus and that all the participator in the surplus must be contributors to the common fund. In other words, there must be complete identity between the contributors and the participators. The question where the members were contributors or not was a question of fact which was to be decided in each case by the authorities concerned. In the . circumstances, on facts, the Division Bench of this Court came to the conclusion that the test of mutuality was satisfied with regard to the laga receipts. The Division Bench further held that it was not necessary that in every matter the members should have actually received the benefit accruing to the common fund and that the principle of mutuality is satisfied even if it is shown that the members had a right -to contribute and that the members had, as participators, the right to receive the benefit accruing to the common fund. It was also held in the above case that the object of the resolution passed by the member's of the exchange in 1959 permitting the exchange to apply part of the laga receipts to the reserve fund or to the Shubhkam fund indicated the case of application of laga receipts and it was not a case of diversion of income by overriding title. The judgment of the Division Bench in the case of Bombay Oilseeds (1993) .202 ITR 198 (Bom.) applies to the facts of present case. In the present case also there is a finding of fact recorded by the learned Accountant Member that all the members of the assessee were also participators. In the present matter, the income did not arise or accrue to the association as held by us hereinabove and, therefore, there was no question of diversion of income by overriding title. The members contributed more than what was required of them. This generated a balance of surplus to its members which came to be apportioned amongst the participators and under the above circumstances it cannot be said that the income chargeable to tax accrued to the assessee-organization. In the present case, each member had a right to contribute to the common fund and each member had a right correspondingly to participate in the benefit accruing to the common fund. In the circumstances, the principle of mutuality is applicable. Further, in the present case, we find that no sooner had the surplus accrued than the amount came to be credited to the members account on pro-rata basis of despatches which clearly shows that no income accrued to the assessee-organization: The surplus did not constitute the profit of the assessee. It only represented savings of the members and, therefore, the distribution of the net surplus of all adjustment accounts referred to above amongst the members on pro-rata basis of despatches will not make the same income of the assessee.

Before concluding, it maybe mentioned that the Income-tax Officer as well as the Appellate Assistant Commissioner have given a finding that the objects of the organization do not constitute charitable purposes within the meaning of section 2(15) of the Income-tax Act. Against the said order of the Appellate Assistant Commissioner, the assessee did not carry the matter in appeal to the Tribunal. In the circumstances, we are not required to go into that question. Moreover, learned counsel for the assessee has given up the claim of the assessee under section 11 of the Income-tax Act.

Accordingly, question No. 1 is answered in the negative and against the Revenue. Question No.2 is answered in the affirmative and against the Revenue. Question No.3 is answered in the negative and against the Revenue.

Accordingly, the reference stands disposed of with no order as to costs

M.B.A./4146/FC Order accordingly