State of Madhya Pradesh. Vs. Awadh
Kishore Gupta & Ors [1960] INSC 248 (30 November 1960)
KAPUR, J.L.
HIDAYATULLAH, M.
SHAH, J.C.
CITATION: 1961 AIR 1144 1961 SCR (2) 798
ACT:
Income-tax--Assessment--Company running a
Stock Exchange and dealing in shares--Admission fees of Members and Authorised
Assistants--If taxable income.
HEADNOTE:
The object with which the appellant company
was formed was to promote and regulate the business in shares, stocks and
securities etc., and to establish and conduct a Stock Exchange in order to
facilitate the transaction of such business. Its capital was divided into
shares on which dividend could be earned. it provided a building wherein
business was to be transacted under its supervision and control. It made rules
for the conduct of business of sale and purchase of shares in the Exchange
premises. During the assessment year in question the company's receipts
consisted of certain amounts received as admission fee from Members and
Authorised Assistants and the question stated to the High Court for its opinion
was whether these fees in the hands of the appellant were taxable income. The
High Court answered the question in the affirmative. It held that the appellant
was not a mutual society, that dividends could be earned on its share capital,
that any person could become a share-holder but every share-holder was not a
member unless he paid the admission fee and the real object of the company was
to carry on business of exchange of stocks and earn profits. The case of the
appellant, inter alia, was that as the amount received as membership fee was
shown as capital in the books of the company and there was no periodicity, it
should be treated as capital receipt exempt from assessment.
799 Held, that the High Court was right in
its decision and the appeals must be dismissed.
It was wholly immaterial how the appellant
treated the amounts in question. It is the nature of the receipt and not how
the assessee treated it that must determine its taxability. AS: Since the fee
received on account of Authorised Assisstants fall within the decision of this
Court in Commissioner of Income-tax v. Calcutta Stock Exchange Association
Ltd., (1959) 36 I.T.R. 222, it must be held to be taxable income.
The question as to whether the Members'
admission fee was taxable income was to be determined by the nature of the
business of the company, its profits and the distribution thereof as disclosed
by its Memorandum and Articles of Association and the rules made for the conduct
of business.
They showed that the income of the company
was distributable amongst its shareholders ;is in any other joint stock
company, and the body of trading members who paid the entrance fees and
share-holders were not identical. The element of mutuality was, therefore,
lacking.
Liverpool Corn Trade Association v. Monks,
(1926) 2 K. B. 110, applied.
Commissioner of Income-tax, Bombay City v.
Royal Western India Turf Club Ltd., [1954] S.C.R. 289 and Styles v. New York
Life Insurance Co., [1889] 2 T.C. 460, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 187 and 190 of 1960.
Appeals from the judgment dated 22nd January,
1957, of the Punjab High Court (Circuit Bench), Delhi, in Civil Reference No. 6
of 1953.
Veda Vyasa, S. K. Kapur and K. K. Jain, for
the appellant.
B. Ganapathi Iyer and D. Gupta, for the
respondent.
1960. November 30. The Judgment of the Court
was delivered by KAPUR, J.-These appeals are brought by the assessee company
against a common judgment and order of the Punjab High Court by which four
appeals were decided in Civil Reference No. 6 of 1953. The appeals relate to
four assessment years, 1947- 48, 1948-49, 1949-50 and 1950-51. Two of these
assessments, i.e., for the years 1947-48 and 1948-49 were made on the 800 appellant
as successor to the two limited companies hereinafter mentioned.
Briefly stated the facts of the case are that
the appellant company was incorporated in the year 1947. Its objects inter alia
were to acquire as a going concern activities, functions and business of the
Delhi Stock & Share Exchange Limited and the Delhi Stock and Share Brokers
Association Limited and to promote and regulate the business of exchange of
stocks and shares, debentures and debenture stocks, Government securities, bonds
and equities of any description and with a view thereto, to establish and
conduct Stock Exchange in Delhi and/or elsewhere. Its capital is Rs. 5,00,000
divided into 250 shares of Rs. 2,000 each on which dividend could be earned.
The appellant company provided a building and a hall wherein the business was
to be transacted under the supervision and control of the appellant. The
appellant company also made rules for the conduct of business of sale and
purchase of shares in the Exchange premises. The total income for the year
1947- 48 was Rs. 29,363 out of which a sum of Rs. 15,975 shown as admission
fees was deducted and the income returned was Rs. 13,388. In the profit and
loss account of that year Members' admission fees were shown as Rs. 9,000 and
on account of Authorised Assistants admission fees Rs. 6,875.
The Income-tax Officer who made the
assessment for the year 1947-48 disallowed this deduction. The return for the
following year also was made on a similar basis but the return for the years
1949-50 and 1950-51 did not take into account the admission fees received but
in the Director's report the amounts so received were shown as having been
taken directly into the balance sheet. The Income-tax Officer, however,
disallowed and added back the amount so received to the income returned by the
appellant.
Against these orders appeals were taken to
the Appellate Assistant Commissioner who set aside the additional assessments
made under s. 34 in regard to the assessment years 1947-48, 1948-49 and 1949-50
and the 4th appeal in regard to the year 1950-51 was decided against the
appellant. Both sides appealed 801 to the Income-tax Appellate Tribunal against
the respective orders of the Appellate Assistant Commissioner and the Tribunal
decided all the appeals in favour of the appellant.
It was held by one of the members of the
Tribunal that the amounts received as entrance fees were intended to be and
were in fact treated as capital receipts and were therefore excluded from
assessment and by the other that as there was no requisite periodicity, those
amounts were not taxable.
At the instance of the respondent a case was
stated to the High Court on the following question:
"Whether the admission fees of Members
or Authorised Assistants received by the assessee is taxable income in its
hands?" The High Court answered the question in favour of the respondent.
The High Court held that the appellant was not a mutual society and therefore
was not exempt from the payment of income-tax; that it had a share capital on
which dividend could be earned and any person could become a shareholder of the
company by purchasing a share but every shareholder could not become a member
unless he was enrolled, admitted or elected as a member and paid a sum of Rs.
250 as admission fee. On becoming a member he was entitled to exercise all
rights and privileges of membership. It also found that the real object of the
company was to carry on business as a Stock Exchange and the earning of
profits. It was held therefore that the admission fees fell within the ambit of
the expression "profits and gains of business, profession or
vocation".
The further alternative argument which was
raised, i.e., that the income fell under s. 10(6) of the Act, was therefore not
decided.
Mr. Veda Vyasa contended on behalf of the
appellant that there were only 250 members of the appellant company; that the
amount received as membership fees was shown as capital in the books of the
company and there was no periodicity and therefore the amounts which had been
treated as income should have been treated as capital receipts and therefore
exempt from assessment. It was firstly contended that the question did not
arise out of the order of the 802 Tribunal and that a new question had been
raised but the objection is futile not only because of the absence of any such
objection at the stage of the drawing up the statement of the case but also
because of failure to object in the High Court; nor do we see any validity in
the objection raised. That was the only matter in controversy requiring the
decision of the court and was properly referred by the Tribunal. It was then
contended that the question had to be answered in the light of facts admitted
or found by the Tribunal and that the nature of the appellant's business or the
rules in regard to membership could not be taken into consideration in
answering the question. That again is an unsustainable argument. The statement
of the case itself shows that all these matters were taken into consideration
by one of the members of the Tribunal and the learned judges of the High Court
also decided the matter on that material which had been placed before the
Income tax authorities and which was expressly referred to in their orders and
which again was placed before the High Court in the argument presented there on
behalf of the appellant company.
It is wholly immaterial in the circumstances
of the present case to take into consideration as to how the appellant treated
the amounts in question. It is not how an assessee treats any monies received
but what is the nature of the receipts which is decisive of its being taxable.
These amounts were received by the appellant as membership admission fees and
as admission fees paid by the members on account of Authorised Assistants. As
far as the latter payment is concerned that would fall within the decision of
this Court in Commissioner of Income-tax. v. Calcutta Stock Exchange
Association Ltd. (1) and therefore is taxable income. The former, i.e., members
admission fees has to be decided in accordance with the nature of the business
of the appellant company, its Memorandum and Articles of Association and the
Rules made for the conduct of business.
The appellant company was an association
which carried on a trade and its profits were divisible as dividend amongst the
shareholders.
(1) (1959) 36 I.T.R. 222.
803 The object with which the company was
formed was to promote and regulate the business in shares, stocks and
securities etc., and to establish and conduct the business of a Stock Exchange
in Delhi and to facilitate the transaction of such business. The business was
more like that in Liverpool Corn Trade Association v. Monks (1). In that case
an association was formed with the object of promoting the interest of corn
trade with a share capital upon which the association was empowered to declare
a dividend. The Association provided a Corn Exchange market, newsroom and
facilities for carrying on business and membership was confined to persons
engaged in the corn trade and every member was required to be a shareholder and
had to pay an entrance fee. The Association also charged the members and every
person making use of facilities a subscription which varied according to the
use made by them. The bulk of the receipts of the Association was derived from
entrance fees and subscriptions. It was therefore contended that the
Association did not carry on a trade and that it was a mutual association and
entrance fees and subscriptions should be disregarded in computing assessment
of the assessable profits. It was held that it was not a mutual association
whose transactions were inca- pable of producing a profit; that it carried on a
trade and the entrance fee paid by members ought to be included in the
associations receipts for purposes of computing the profit.
Rowlatt, J. said at p. 121:
"I do not see why that amount is not a
profit. The company has a capital upon which dividends may be earned, and the
company has assets which can be used for the purpose of obtaining payments from
its 'members for the advantages of such use, and one is tempted to ask why a
profit is not so made exactly on the same footing as a profit is made by a
railway company who issues a traveling ticket at a price to one of its own
shareholders, or at any rate as much a profit as a profit made by a company
from a dealing with its own shareholders in a line of business which is
restricted to the shareholders." (1) (1926) 2 K.B. 110.
804 In Commissioner of Income-tax, Bombay
City v. Royal Western India Turf Club Ltd. (1) this Court rejected the
applicability of the principle of mutuality because there was no mutual dealing
between members inter se. There was no putting up a common fund for discharging
a common obligation undertaken by the contributors for their mutual benefit and
for this reason the case decided by the House of Lords in Styles V. New York
Life Insurance Company (2) was held not applicable.
In the present case the Memorandum of
Association shows that the object with which the company was formed was to
promote and regulate the business of exchange of stocks, shares, debentures,
debenture stocks etc. The income, if any, which accrued from the business of
the appellant company was distributable amongst the shareholders like in every
joint stock company. According to the Articles of Association the members
included shareholders and members of the Exchange and according to the
rules-and bye-laws of the appellant company 'member' means an individual, body
of individuals, firms, companies, corporations or any corporate body as may be
on the list of working members of the Stock Exchange for the time being. In the
Articles of Association cls. 7 & 8, provision was made for the election of
members by the Board of Directors and Rules 9 & 10 laid down the procedure
for the election of these members. The entrance fees were payable by the
trading members elected under the Rules and Bylaws of the Association, who
alone with their Associates, could transact business in stocks and shares in
the Association. Therefore, the body of trading members who paid the entrance
fees, and the shareholders among whom the profits were distributed were not
identical and thus the element of mutuality was lacking. It is the nature of
the business of the company and the profits and the distribution thereof which
are the determining factors and in this case it has not been shown that the
appellants business was in any way different from that which was carried on in
the (1) [1954] S.C.R. 289, 308.
(2) (1889) 2 T.C. 460.
805 case reported as Liverpool Corn Trade
Association v. Monks (1).
In our opinion the judgment of the High Court
is right and the appeals are therefore dismissed with costs. One hearing fee.
Appeals dismissed.
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