DELHI (SMC) BENCH ASSISTANT MINI STEEL v. COMMISSIONER OF RESEARCH INSTITUTE INCOME TAX (E) March 31, 2006 JUDGMENT 1.This appeal has been filed by assessee against order of ld. CIT(A) dated 25-11-2004. assessee has raised thefollowing grounds in this appeal:' "1.That ld. CIT(A) isnot justified in law and facts while confirming order of Assessing Officerin determining income of society at Rs. 3,02,000. 2.That, ld. CIT(A) as well as Assessing Officer arelegally incorrect under law for treating Rs. 2,70,000 received by theappellant to form corpus of society as "Income" under section2(24)(iia) (before amendment by Finance Bill, 1988). 3.That CIT(A) is not justified in law and fact whileconfirming order of Assessing Officer in treating society as AOP inspite of fact that assessee is Registered Mutual Benefit Society underthe law. 4.That, without prejudice to theabove grounds of appeal, ld. CIT(A) is erred in law while confirming theorder of Assessing Officer in ignoring expenses of Rs. 1,41,156 incurred bythe appellant for purpose of its activities, in determining its taxableincome. 5.That, appellant craveshereto add, alter, modify, vary, delete any grounds of appeal before or at thetime of hearing. Therefore,it is prayed that income assessed at Rs. 3,02,000 by ld. Assessing Officermay please be assessed at nil income as declared by appellant or anyother suitable order as your honour may deem fit be passed." 2.Dr. Rakesh Gupta, Shri Ashwani Taneja and Shri Jitender Saini, Advocates,appeared for assessee whereas Shri Ram Mohan, D.R. represented revenue. 3.The assessee was registered as society. It was formed by seven members whowere Directors of various RNNC companies. object for forming society,as laid down in Memorandum of Association, was as under:' "Theobjects of Institute are to acquire technical know-how from sourcesanywhere in world, to adapt such know-how to Indian conditions, toorganize, sponsor, promote, establish, conduct and undertake such research inany areas, connected with manufacturing and processing of Iron and Steeland other Metals and alloys whether ferrous or non-ferrous." Atthe time of incorporation, admission fee of Rs. 2,30,000and membership fee of Rs. 72,000 was received for year ending 30-9- 1983relevant to assessment year 1984-85. In its return, assessee showedloss of Rs. 69,156. assessee had claimed expenditure of Rs. 1,41,156. Assessing Officer passed order on 24-9-1986under section 143(3) assessing income at Rs. 3,02,000.He did so on ground that benefit of section 11 had been denied to theassessee because it could not get registration under section 12A(a). 4.In appeal, ld. CIT(A) set aside order of theAssessing Officer vide his order dated 10-3-1987 for deciding matterafresh. Assessing Officer in compliance, again assessed income at Rs. 3,02,000 vide his order dated 10-3-1989. assesseepreferred appeal against order of Assessing Officer and ld. CIT(A) allowed appeal in favour of assessee videorder dated 24-2-1997. Against this order, revenue came in appeal beforethe ITAT and ITAT vide order dated 13-8-2002 again set aside thematter to ITO for passing fresh order. ITO assessed income at Rs.3,02,000 vide his order dated 26-2-2004.Against this third order of ITO, assessee filed appeal before ld. CIT(A), who has upheld order of ITO. 5.In this background, we proceed to decide grounds taken before us by theassessee. 6.The ld. counsel for assessee Shri Rakesh Gupta, at outset, submittedthat departmental authorities have not properly considered issue.According to him, assessee was mutual benefit association which wasformed out of subscriptions raised from members and as per Memorandumof Association surplus of Society at time of dissolution was to bedistributed amongst members. It was further submitted by him that doctrineof mutuality was fully applicable in this case and amount received by theassociation from membership fee and admission fee formed corpus and was notchargeable to tax under section 4 of Income- tax Act. ld. counselfurther pointed out that departmental authorities have misunderstood theissue and have gone on effect of denial of registration to Association.He laid much emphasis on relevant provisions of Income-tax Act, includingsection 4 and section 24, as applicable in assessment year 1984-85. ld.counsel for assessee made reference to detailed submissions submittedbefore CIT(A), copy of which is available atpages 1 to 15 of Paper Book. His main grievances are that although ld. CIT(A) has reproduced some of submissions but has notconsidered same properly. 7.The stand of ld. counsel was that amount collected by society formutual concern was not chargeable to tax as assessee Society was formedwith contributions and admission fee of members forming it. It was explained byhim that it was mutual benefit society and members had contributed to acommon fund and also were to participate in surplus, if any, in case ofdissolution. In this regard, ld. counsel made reference to decision ofCalcutta High Court in case of CIT v. Indian Paper MillsAssociation [1994] . 8.The ld. D.R., on other hand, supported order of ld. CIT(A). 9.We have carefully considered entire material on record, including thefollowing papers:' (i)Theregulations of firm. (ii)Income-tax return filed by assessee forassessment year 1984-85, in which following note has been given:' "Assessee being mutual benefit Society, no tax ispayable". (iii)Balance sheet as on 30-9-1983, in which corpusof research fund has been shown at Rs. 2,30,000 onaccount of admission fee. excess of expenditure over income has been shownat Rs. 69,156. details of expenditure have been given in income andexpenditure account. It is to be observed that in first assessment orderthe Assessing Officer, has made followingobservations:' "The constitution of society is only forindustrialists engaged in steel industry and No. 7 only but article ofassociation do provide that number can be increased with consent of theGoverning Body. Since this is case of society, duly registered under theSocieties Registration Act, income earned by it though mutual contributionfor members only and also looking into account that this donation is forthe common cause formed part of voluntary income. assessee has shownthese receipts in account which clearly shows that assessee is offeringthis income for taxing." Fromthe above observations, it is clear that issue relating to mutualcontribution was very much under consideration at time of assessmentorder. However, despite these observations, Assessing Officer held thecorpus donation etc. as chargeable to tax on ground that benefit of section11 was denied to assessee. This was not correct approach. issueshould have been decided on basis of doctrine of mutuality. CIT(A) in appellate order dated 10-3-1987 fell into thesame error. In subsequent orders also, confusion remained. However, inhis order dated 24- 2-1997, available at pages 42 and 43 of Paper Book, theld. CIT(A), while allowing appeal of assessee,has observed that assessee Society had no other income and only sourceof income of Society was from membership fee in year underconsideration which was at Rs. 72,000. He held that income of Rs. 3,02,000 is not liable to tax. revenue challenged thisorder before ITAT on ground that Assessing Officer was not providedany opportunity by ld. CIT(A). In letter dated23-2-2004 filed by assessee, which is available atpage 57, it was categorically submitted that it was mutual benefit societyformed with object to acquire technical know-how. But these submissionswere not considered by departmental authorities. 10.On going through above documentary evidence, filed by assessee, it isclear that departmental authorities have not considered main issue. Theassessee society has been formed as mutual benefit society as is clear fromthe material before us and, therefore, its income cannot be charged to tax. Inthe case of CIT v. Indian Paper Mills Association [1994] (Cal.) Hon'ble High Court has observed as under: "Themain test of mutuality is complete identity of contributors with therecipients. cardinal requirement is that all contributors to commonfund must be entitled to participate in surplus and that all theparticipators in surplus must be contributors to common fund; in otherwords, there must be complete identity between contributors and theparticipants. If this requirement is satisfied, particular form which theassociation takes is immaterial. right of members of club regardingthe disposal of surplus at time of dissolution of club cannotnullify principle of mutuality inasmuch as participators themselvesshould decide how surplus fund should be utilised, in years underconsideration." Inthe case of Bankipur Club Ltd. ( supra), Hon'ble SupremeCourt has held that contribution to common fund made by mutual benefitsociety cannot be subjected to tax. Hon'ble Supreme Court has made thefollowing observations: "Underthe Income-tax Act, what is taxed is, 'income, profits or gains' earned or'arising', 'accruing' to 'person'. Where number of persons combine togetherand contribute to common fund for financing of some venture or object andin this respect have no dealings or relations with any outside body, then anysurplus returned to those persons cannot be regarded as any sense or profit.There must be complete identity between contributors and participators.If these requirements are fulfilled, it is immaterial what particular form theassociation takes. Trading between persons associating together in this waydoes not give rise to profits, which are chargeable to tax. Where trade oractivity is mutual, fact that, as regards certain activities, certainmembers only of association take advantage of facilities which itoffers does not affect mutuality of enterprise." Inview of above, it is clear that corpus as well as membership fee collectedby members of Society could not have been subjected to tax. TheDepartmental authorities have not appreciated this aspect of matter. It maybe due to fact that issue was not properly raised before them. However,it is legal issue which should have been appreciated and can definitely beconsidered at appellate stage. In view of above, we accept contentionof ld. counsel for assessee that on facts and circumstances of thiscase, Departmental authorities were not justified in determining thetaxable income of assessee at Rs. 3,02,000. Thegrounds taken by assessee are, therefore, allowed in favour of theassessee. 11.In result, appeal of assessee is allowed. *** Mini Steel Research Institute v. Assistant Commissioner of Income-tax (E)