1. 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 assessm ent 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?"
2. 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.
3. 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 assessm ent 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.
4. 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.
5. 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.
6. 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.
7. 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.
8. Accordingly, the reference stands disposed of with no order as to costs