JAWAHAR LAL GUPTA, J. - (1.) HAS the Tribunal erred in applying the principle of 'mutuality' and in thus allowing deduction of the amounts received by the assessee on account of entrance fee, contributions and forfeiture of the payments made by the ex members? This is the short question that arises in the appeal filed by and the two references made at the instance of the Revenue.
(2.) MR . R.P. Sawhney, counsel for the Revenue, has referred to the facts in IT Ref. No. 3 of 1998. These may be briefly noticed. The assessee filed its return of income for the asst. year 1983 84. It declared a loss of Rs. 19,21,534. This amount consisted of the loss of Rs. 10,81,580 for the year under question and the unabsorbed loss of Rs. 8,39,954 for the earlier year. The accounting period tallied with the calendar year and ended on 31st Dec., 1982. The assessee claimed to be a mutual benefit association. It was constituted to advance, promote and protect the interests of dealers of motor cycles and tractors, etc. manufactured by M/s Escorts Limited. The amounts received from the members by way of entrance fee or contributions and the forfeited amounts of ex members were claimed to be not liable to tax on the basis of the principle of 'mutuality'. An amount of Rs. 2,37,753 was disclosed as income from interest. It was offered as taxable income. An expenditure of Rs. 13,23,802 was claimed. Thus, there was a loss of Rs. 10,81,580. The AO held that the surplus of the total receipts over expenditure is chargeable to tax as the amounts were received by the assessee for specific services so as to be exigible to tax under S. 28 (iii) of the IT Act, 1961. The income was accordingly assessed at Rs. 3,88,904. The order was confirmed by the CIT(A). On second appeal by the assessee, the Tribunal held that the entrance fee as also the contribution for members was outside the purview of income for specific services. Similarly, the claim of the Revenue regarding the forfeited amount of former members was negatived. Aggrieved by the order, the Revenue sought reference under S. 256(1) of the Act. The application having been dismissed, it filed a petition under S. 256(2). In pursuance to the directions of this Court, the Tribunal has referred the following question for the opinion of this Court : "Whether, on the facts and in the circumstances of the case, the learned Tribunal is right in law in holding that the surplus of the company on account of entrance fee, contribution from the members and forfeited amount of ex members was not liable to tax as income from business thereby deleting the addition of Rs. 3,88,904?" On behalf of the Revenue, it has been contended that the assessee is a company. It is totally distinct from the members. Therefore, the principle of mutuality cannot be invoked. Learned counsel has placed reliance on the decision in CIT vs. Dharmavaram Mutual Benefit Permanent Fund Ltd. (1968) 67 ITR 673 (AP) : TC 38R.571. Secondly, it has been submitted that the principle of mutuality could not have been invoked as the contributions were charged from the dealers at the rate of Rs. 10 per motor cycle and Rs. 40 per tractor, respectively. A corresponding contribution was made by the manufacturer. All the funds were used for the advertisement and, thus, for the benefit of manufacturers. Similarly, the forfeited amounts were retained by the company and were not used for the benefit of the members. Thus, the authorities under the Act had erred in allowing the deductions.
(3.) ON the other hand, Mr. G.C. Sharma contended that the assessee is not a company of shareholders. It is a company limited by guarantee. With reference to the articles and memorandum of association, the counsel pointed out that it was a mutual benefit association. The contributions by the members were used for their benefit only. The company was not working for profit. At the time of windingup, the assets are to be shared equally amongst the members on that date. Counsel pointed out that the Revenue had not claimed that the assessee was an entity different from its members. In particular, the counsel referred to an affidavit filed on behalf of the Revenue in CWP No. 6397 of 1987. In para 12, it had been specifically admitted that the company was a mutual benefit association. On these premises, the counsel contended that the claim of the Revenue cannot be sustained.;