REPORTABLE IN SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 2847 OF 2010 Yum! Restaurants (Marketing) Private Limited ...Appellant(s) Versus Commissioner of Income Tax, Delhi ...Respondent(s) JUDGMENT A.M. Khanwilkar, J. 1. moot question involved in present appeal bears upon applicability of doctrine of mutuality qua assessee company, fully owned subsidiary of Yum! Restaurants (India) Pvt. Ltd. (for short, YRIPL ), formerly known as Tricon Restaurants India Pvt. Ltd., incorporated for undertaking activities relating to Advertising, Marketing and Promotion (for short, AMP activities ) for and on behalf of YRIPL and its franchisees. Signature Not Verified Digitally signed by DEEPAK SINGH Date: 2020.04.24 12:21:44 IST Reason: 2 2. This appeal assails final judgment and order dated 1.4.2009 passed by High Court of Delhi at New Delhi (for short, High Court ) in I.T.A. No. 1433 of 2008 wherein question of taxability of Rs. 44,44,002/ (Rupees forty four lakhs forty four thousand two only), being excess of income over expenditure for Assessment Year 2001 02, was settled in favour of Revenue and against assessee, thereby confirming orders of Income Tax Appellate Tribunal (for short, Tribunal ), Commissioner of Income Tax (Appeals) [for short, CIT(A) ] and Assessing Officer. preceding forums, without any exception, have returned consistent verdicts refusing to acknowledge assessee company as mutual concern and denying any exemption from taxability. 3. appellant company Yum! Restaurants (Marketing) Private Limited (for short, YRMPL or assessee company or assessee ) was incorporated by YRIPL as its fully owned subsidiary after having obtained approval from Secretariat for Industrial Assistance (for short SIA ) for purpose of economisation of cost of advertising and promotion of franchisees as per their needs. approval was granted subject 3 to certain conditions as regards functioning of assessee, whereby it was obligated to operate on non profit basis on principles of mutuality. relevant clauses of approval granted by SIA for aforementioned operations read thus: 3. It is noted that broad framework within which such subsidiary shall be managed and operated in India is as follows: franchises and Tricon India will both make contribution of fixed percentage of their respective revenues (net of taxes) to proposed New Company on regular basis; proposed New Company would be non profit enterprise governed by principles of mutuality. No part of contributions or other income shall enure to benefit of any individual contributor; contributors will be optimally used by proposed new Company to economise cost of advertising and promotion cater to specific needs of franchisees to concentrate on restaurant operations and management; management of proposed New Company shall vest with Tricon India and application of contributions will be decided by Tricon India in consultation with franchisee; xxx xxx xxx approval is subject to condition that step down subsidiary would be non profit enterprise and would not be allowed to repatriate dividends. 4. In furtherance of approval, assessee entered into Tripartite Operating Agreement (for short, Tripartite Agreement ) with YRIPL and its franchisees, wherein assessee company received fixed contributions to extent of 5 per cent 4 of gross sales for proper conduct of advertising, marketing and promotional activities for mutual benefit of parent company and franchisees. terms of Tripartite Agreement, to extent relevant for consideration of present case, are produced thus: 2.2 TRIM will establish and operate Brand Funds in respect of each Brand for purpose of allocating and using Advertising Contribution received from franchisee and other franchisee of Tricon operating Restaurants under Brands. TRIM will allocate advertising contribution received from Franchisees including Franchisee for each Restaurant to respective Brand funds established for that brand. It is agreed between Parties that advertising contribution paid into brand fund will be used for AMP Activities relating to that brand. 3. FRANCHISEE ADVERTISING CONTRIBUTIONS 3.1 As and from Effect Date, Franchisee will pay Advertising Contribution of 5% of Revenues for particular month into Bank account of Brand Fund established by TRIM by 10th day of following month. Details of bank account, of each Brand Fund set up by TRIM will notified to Franchisee by TRIM from time to time. Notwithstanding aforesaid, executive committee of any Brand (constituted under Article 7 of this Agreement) may, by three fourth majority, which shall be binding on all franchisees of Tricon including Franchisee, require franchisee to pay advertising Contribution in advance. For avoidance of doubt it is clarified and agreed that while recommending advance payment of Advertising Contribution chairman will not have casting vote. Franchise will spend additional 1% of Revenues, in manner directed by Tricon and/or TRIM in writing from time to time, on such local store marketing, advertising, promotional and research expenditure proposed by Franchisee and approved in advance by Tricon and/or TRIM during relevant Accounting Period, in 5 accordance with requirements and guidelines set out in Manuals, provided that if Franchisee fails to spend full amount as directed by Tricon and/or TRIM franchisee will pay unspent amount to TRIM within period specified in written demand from TRIM. Upon receipt of unspent amount TRIM will spend amount on regional and/or national advertising, promotions or research expenditure conducted by TRIM in its discretion....... xxx xxx xxx 4.1 Tricon may at request of TRIM, but subject to Tricon s sole and absolute discretion pay to TRIM any such amount(s) as it may deem appropriate to support AMP [sic] activities during any Accounting Period for avoidance of doubt, it is clarified and agreed between Parties that Tricon shall have no obligation to pay any such amounts if it chooses not to do so. xxx xxx xxx 8.4 In event there is any surplus left over in any of Brand Funds at end of accounting period, TRIM shall be entitled to retain surplus to be spent on AMP activities during following accounting period. Alternatively, TRIM may, subject to approval of its Board of Directors refund surplus amounts to franchisees including Franchisee in same proportion as actual advertising contribution made by each franchisee including franchisee in that accounting period. On other hand, if there is deficit in any of brand funds at end of accounting period, deficit will be carried forward to next accounting period and be met out of advertising contribution paid by franchisees including franchisee for that accounting period. For avoidance of doubt, it is agreed between parties that Tricon and/or TRIM shall not be obliged to fund deficit. 8.5 It is clearly understood and agreed between parties that only objective of TRIM is to coordinate marketing activities of brands including mutual benefit of franchisees including Franchisee. It is envisaged that no profits will be earned and no dividends will be declared by TRIM. 6 (emphasis supplied) 5. For Assessment Year under consideration, assessee filed its returns stating income to be Nil under pretext of mutual character of company. same was not accepted by Assessing Officer, who observed thus: VI.7.3 As per SIA letter dated 05.10.1998 Assessee Company along with franchisees were to contribute fix percentage of its revenue to YRMPL. However as per clause 4.1 of Tripartite operating agreement submitted by YRMPL, assessee company had its sole absolute discretion to pay to YRMPL any amount as it may deem appropriate and that YRIPL shall have no obligation to pay any such amounts if it chooses not to do so. This clearly shows that YRIPL was under no legal obligation to pay any amount of contribution as per its own version reflected from tripartite agreement. 6. imposition of liability by Assessing Officer was upheld by C.I.T. (A) on ground of taint of commerciality in activities undertaken by assessee company, wherein it was observed thus: 1.14 ....The AMP activity is quite critical component of running successful business venture, it is intrinsically linked to sales and profit of franchisees contributors. Accordingly it cannot be said that such activity is immune from taint of commerciality. Unlike in cases of club, appellant Co. is not existing for any social inter course nor is it for cultural activities where idea of profit or trade does not exist. What is essential is that there should not be any dealing with outside body which results in benefit which promotes some commercial/business venture. There should not be any profit earning motive in any transaction directly or indirectly. In fact in appellant s case essence of mutuality also appears to be missing in that there is no instance or scope of say trading between persons 7 associating together. Thus though form taken up to conduct its revenue activity undoubtedly resemble mutual concern but contributions made on other hand are undeniably for business considerations. In my opinion, taking overall view of intent and motive of appellant company to form mutual concern it can be concluded that underlying purpose was solely for commercial consideration. Therefore in view of above as demonstrated by appellant Co. excess of receipts over expenditure i.e. surplus in my opinion would be income liable to tax . 7. liability was further confirmed by Tribunal, wherein essential ingredients of doctrine of mutuality were found to be missing. It observed thus: 11. .... Firstly Government order sanctioning setting up of wholly owned subsidiary prescribes that approval is subject to condition that such subsidiary would be non profit enterprise and is also not entitled to repatriate dividends. main object of assessee company reveals that it is to carry out advertising, marketing and promotion for brands owned by its parent company. main plank of assessee s arguments is that principles of mutuality will apply and hence income cannot be taxed. Time and again various courts have held that where there is complete identity between contributors and participators or beneficiaries, only then such principles can be applied. However, in present case it is seen that apart from contributions is also received from M/s Pepsi Foods Ltd. and YRIPL. Pepsi Foods Ltd. is neither franchisee nor beneficiary. Similarly some contribution is also received from YRIPL which YRIPL is not under any obligation to pay. Thus it can be said that essential requirement that of contributors to common fund are either to participate in surplus or they are beneficiaries of contribution is missing. Through common AMP activities no benefit accrues to Pepsi Food Ltd. or YRIPL. Accordingly principles of mutuality cannot be applied. It is different facts that assessee was established with object not to make profit but it is also fact that there is surplus in hands of 8 assessee which arose due to contribution from certain persons who were neither benficiaries nor have right to receive surplus.... (emphasis supplied) 8. consistent line of opinion recorded by aforementioned three forums was further approved in appeal by High Court vide impugned judgment, by observing thus: 8. ....The principle of mutuality as enunciated by Courts in various cases is applicable to situation where income of mutual concern is contributions received from its contributors. expenses incurred by mutual concerns are incurred from such contributions and hence on principle that no man can do business with himself, excess of income over expenditure is not amenable to tax. However, in present case authorities below have returned finding of fact that fund as contributors such as Pepsi Food Ltd which do not benefit from APM Activities. Moreover, principle of mutuality is applicable to those entities whose activities are not tinged with commercial purpose. As matter of fact in instant case parent company i.e., YRIPL which has also contributed to brand fund is under agreement under no obligation to do so. contributions of YRIPL are at its own discretion. Thus, looking at facts obtaining in present case, it is quite clear that principle of mutuality would not be applicable to instant case.... 9. On cogitating over rival submissions, we reckon that following questions of law would arise for our consideration in present case: (i) Whether assessee company would qualify as mutual concern in eyes of law, thereby exempting subject transactions from tax liability? 9 (ii) Whether excess of income over expenditure in hands of assessee company is not taxable? 10. appellant/assessee has contended that sole objective of assessee company was to carry on earmarked activities on no profit basis and to operate strictly for benefit of contributors to mutual concern. It has further been contended that assessee company levies no charge on franchisees for carrying out operations. While assailing observations made in impugned judgment, holding that Pepsi Foods Ltd. and YRIPL are not beneficiaries of concern, assessee company has urged that YRIPL is parent company of assessee and earns fixed percentage from franchisees by way of royalty. Therefore, it benefits directly from enhanced sales as increased sales would translate into increased royalties. similar argument has been advanced as regards Pepsi Foods Ltd. It is stated that under marketing agreement, franchisees are bound to serve Pepsi drinks at their outlets and thus, increase in sales at KFC and Pizza Hut outlets as result of AMP activities would lead to corresponding increase in sales of Pepsi. To add weight to this argument, it has been brought to our notice that Pepsi was also advertised by 10 franchisees in their advertising and promotional material, along with Pizza Hut and KFC, and copy of said material has been placed on record. 11. As regards doctrine of mutuality, it is urged by assessee company that doctrine merely requires identity between contributors and beneficiaries and it does not contemplate that each member should contribute to common fund or that benefits must be derived by beneficiaries in same manner or to same extent. Reliance has been placed by appellant upon reported decisions to draw parallel between functioning of assessee company and clubs to support presence of mutuality. 12. Revenue/respondent has countered submissions made by assessee company by submitting that moment non member joins common pool of funds created for benefit of contributors, taint of commerciality begins and mutuality ceases to exist in eyes of law. It has been submitted that assessee company operated in contravention of SIA approval as contributions were received from Pepsi, despite it not being member of brand fund. To buttress this 11 submission, it is urged that once basic purpose of benefiting actual contributors is lost, mutuality stands wiped out. 13. We have heard Mr. Balbir Singh, learned senior counsel for appellant and Mr. V. Shekhar, learned senior counsel for respondent. Re: Question (i): 14. doctrine of mutuality traces its origin from basic principle that man cannot engage into business with himself. For that reason, it is deemed in law that if identity of seller and buyer; or vendor and consumer; or contributor and participator is marked by oneness, then profit motive cannot be attached to such venture. Thus, for lack of profit motive, excess of income over expenditure or surplus remaining in hands of such venture cannot be regarded as income taxable under Income Tax Act, 1961 (for short, 1961 Act ). What is taxable under 1961 Act is income or profits or gains as they accrue to person in his dealings with other party or parties that do not share same identity with assessee. For income, there is underlying 12 exchange of commercial nature between two different entities. In Commissioner of Income Tax, Bihar v. Bankipur Club Ltd.1, this court observed on nature of liability under 1961 Act thus: 6. Under Income Tax Act (hereinafter referred to as Act ) what is taxed is, "income, profits or gains earned or "arising", "accruing" to person". question is whether in case of members clubs species of mutual undertaking in rendering various services to its members which result in surplus, club can be said to "have earned income or profits" In order to answer question, it is necessary to have background of law relating to "mutual trading" or "mutual undertaking" and "members club". 15. law regarding tenets of mutuality is no more res integra. It has been settled in catena of judicial pronouncements and academic works across multiple jurisdictions. In Bangalore Club v. Commissioner of Income Tax & Anr.2, this Court authoritatively quoted one of earliest judicial pronouncements in New York Life Insurance Co. v. Styles (Surveyor of Taxes)3 thus: When number of individuals agree to contribute funds for common purpose. . . and stipulate that their contributions, so far as not required for that purpose, shall be repaid to them. I cannot conceive why they should be regarded as traders, or why contributions returned to them should be regarded as profits. 1 (1997) 5 SCC 394 2 (2013) 5 SCC 509 3 (1889) 2 TC 460 13 proposition of law is restated in Bankipur Club (supra) and Bangalore Club (supra) by placing reliance upon following extract from Simon s Taxes4: it is settled law that if persons carrying on trade do so in such way that they and customers are same persons, no profits or gains are yielded by trade for tax purposes and therefore no assessment in respect of trade can be made. Any surplus resulting from this form of trading represents only extent to which contributions of participators have proved to be in excess of requirements. Such surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that profits should be capable of coming back at some time and in some form to persons to whom goods were sold or services rendered..." 16. In order to undertake examination of mutuality, we gainfully advert to English and Scottish Joint Co operative Wholesale Society Ltd. v. Commissioner of Agricultural Income Tax, Assam5, which has been quoted with approval by this Court in Commissioner of Income Tax, Bombay City v. Royal Western India Turf Club Ltd. 6 and Bangalore Club (supra). aforestated stream of judicial pronouncements expound three conditions/tests to prove existence of mutuality: 4 Simon s Taxes, Volume B, 3rd Edition, Pgs. 159, 167 5 AIR 1948 PC 142 6 AIR 1954 SC 85 14 (i) Identity of contributors to fund and recipients from fund; (ii) Treatment of company, though incorporated as mere entity for convenience of members and policy holders, in other words, as instrument obedient to their mandate, and; (iii) Impossibility that contributors should derive profits from contributions made by themselves to fund which could only be expended or returned to themselves. Whereas legal position on what amounts to mutual concern stands fairly settled, factual determination of same on case to case basis poses complex issue that requires deeper examination. Such examination ought to be conducted in light of tests enunciated above. Common Identity 17. first element involves test of commonality of identity between members or participators in mutual concern and beneficiaries thereof. Succinctly put, this limb of three pronged test requires that no person ought to contribute to 15 common fund without having entitlement to participate as beneficiary in surplus thereof. Conversely, no person ought to participate as beneficiary without first having been contributor or member of class of contributors to common fund. Common identity, as it occurs in present context, signifies that class of members should stay intact as transaction progresses from stage of contributions to that of returns/surplus. It must manifest uniformity in class of participants in transaction. moment such transaction opens itself to non members, either in contribution or surplus, uniformity of identity is impaired and transaction assumes taint of commercial transaction. emphasis on words member and non member is of import because doctrine of mutuality does not prohibit inclusion or exclusion of new members. What is prohibited is infusion of participant in transaction who does not become member of common fund, at par with other members, and yet participates either in contribution or surplus without subjecting itself to mutual rights and obligations. principle of common identity prohibits any one dimensional alteration in nature of participation in mutual fund as transaction 16 fructifies. Any such alteration would lead to non uniform participation of external element or entity in transaction, thereby opening scope for manifest or latent profit based dealing in transaction with parties outside closed circuit of members. It would be amenable to income tax as per Section 2(24) of 1961 Act. Completeness of Identity 18. Coterminous with requirement of common identity, as discussed above, law also contemplates completeness of identity between contributors and participators. theory of completeness of identity presupposes contributors and participators to be two separate classes, but there is oneness or equality in matter of sharing of surplus/profits. This is to ensure that there is no interference of any alien commercial entity in transaction. With interference of any alien entity, idea of conducting business with oneself is defeated and any profits or gains accruing therefrom become subject to tax liability. This proposition of law is succinctly predicated in British Tax Encyclopaedia7, which reads thus: 7 British Tax Encyclopedia (I), 1962 Edition, Pgs. 1200 and 1201 17 For this doctrine to apply it is essential that all contributors to common fund are entitled to participate in surplus and that all participators in surplus are contributors, so that there is complete identity between contributors and participators. This means identity as class, so that at any given moment of time persons who are contributing are identical with persons entitled to participate; it does not matter that class may be diminished by persons going out of scheme or increased by others coming in It is pertinent to note that in order to determine breach in mutuality, court is well within its powers to go beyond periphery of concern and undertake examination akin to lifting of veil in order to discern real nature thereof. 19. In present case, it is indisputable that Pepsi Foods Ltd. is contributor to common pool of funds. However, it does not participate in surplus as beneficiary for at least two reasons first, Pepsi is not member of purported mutual concern as Tripartite Agreement as well as terms of SIA approval permit only franchisees to become members of mutual concern. Notably, Pepsi Foods Ltd. is not franchisee and thus, it cannot participate in surplus. Second, Pepsi does not enjoy any right of participation in surplus or any right to receive back surplus which are mandatory ingredients to sustain principle of mutuality. 18 20. We find it noteworthy that Tripartite Agreement requires assessee company to constitute separate Brand Fund for each franchisee as stated in clause 2.2 of said agreement, which reads thus: 2.2 TRIM will establish and operate Brand Funds in respect of each Brand, for purpose of allocating and using Advertising Contribution received from franchisee and other franchisee of Tricon operating Restaurants under Brands TRIM will allocate advertising contribution received from franchisees including Franchisee for each Restaurant to Parties that Advertising Contribution paid into Brand Fund will be used for AMP Activities relating to that Brand. (emphasis supplied) Since no Brand Fund, as contemplated above, has been constituted for Pepsi Foods Ltd., it does not become part of purported Tripartite mutual arrangement so as to qualify as beneficiary of mutual operations. definition clause of Tripartite Agreement adds weight to this finding. Advertising Contribution , as defined in definition clause means, advertising contributions which Franchisee has agreed to pay to Tricon pursuant to [sic] Franchisee Agreements. Furthermore, Franchise Agreements , as defined in definition clause, means agreements executed between Tricon and Franchisee. As corollary, what follows is that for any amount received by assessee company to be treated as 19 advertising contribution, it must be paid by franchisee, that too in aftermath of prior franchisee agreement to that effect. In light of prevailing relationship, there is no such franchisee agreement between Tricon or TRIM and Pepsi Foods Ltd. and therefore, amounts received from Pepsi Foods Ltd. cannot be viewed as advertising contributions from member of mutual undertaking as such. 21. In present case, therefore, assessee company is realising money both from members as well as non members in course of same activity carried on by it. This court, in Royal Western India Turf Club Ltd. (supra) has categorically held such operations to be antithetical to mutuality. We deem it apposite to take note of dictum in Bankipur Club (supra), wherein this principle has been restated thus: 22. ...if object of assessee company claiming to be mutual concern or club , is to carry on particular business and money is realised both from members and from non members, for same consideration by giving same or similar facilities to all alike in respect of one and same business carried on by it, dealings as whole disclose same profit earning motive and are alike tainted with commerciality... and resultant surplus is profit income liable to tax 22. contention of assessee company that Pepsi Foods Ltd., in fact, does benefit from mutual operations by virtue of 20 its exclusive contracts with franchisees is tenuous, as very basis of mutuality is missing as far as Pepsi Foods Ltd. is concerned, as discussed hitherto. Even if any remote or indirect benefit is being reaped by Pepsi Foods Ltd., same cannot be said to be in lieu of it being member of purported mutual concern and therefore, cannot be used to fill missing links in chain of mutuality. Concededly, surplus of mutual operation is meant to be utilised by members of mutual concern as members enjoy proximate connection with mutual operation. Non members, including Pepsi Foods Ltd., stand on different footing and have no proximate connection with affairs of mutual concern. exclusive contract between franchisees and Pepsi Foods Ltd. stands on independent footing and YRIPL as well as assessee company are not responsible for implementation of this contract. Resultantly, first limb of three pronged test stands severed. Non profiteering and Obedience to Mandate 21 23. Whereas doctrine of mutuality stands debunked with failure of first test, let us, nonetheless, examine other two tests in present factual scenario. Indubitably, receipt of money from outside entity without affording it right to have share in surplus does not only subjugate first test of common identity, but also contravenes other two conditions for existence of mutuality i.e. impossibility of profits and obedience to mandate. mandate of assessee company was laid down in SIA approval wherein twin conditions of mutuality and non profiteering were envisioned as sine qua non for functioning of assessee company. contributions made by Pepsi Foods Ltd. tainted operations of assessee company with commerciality and concomitantly contravened pre requisites of mutuality and non profiteering. 24. mutuality and non profiteering character of concern are to be determined in light of its actual working structure and factum of corporation or incorporation or form in which it is clothed is immaterial. It is, therefore, imperative to examine actual functional framework of assessee company in light 22 of status of YRIPL (parent company) vis vis other members/franchisees. As per terms of SIA approval, YRIPL and franchisees were equally obligated to make contribution of fixed percentage to assessee company. This requirement was incorporated as pre condition for grant of permission to operate as mutual concern. Clause 3 of approval letter reads thus: franchises and Tricon Indian will both make contribution of fixed percentage of their respective revenues (net of taxes) to proposed New Company on regular basis: However, drifting from this mandate, Tripartite Agreement made it discretionary upon YRIPL to contribute to common pool, thereby putting it at higher pedestal than franchisees. Clause 4.1 of Tripartite Agreement reads thus: 4.1 Tricon may at request of TRIM, but subject to Tricon sole and absolute discretion pay to TRIM any such amount(s) as it may deem appropriate to support VVIP activities during Accounting Period for avoidance of doubt, it is clarified and agreed between Parties that Tricon shall have no obligation to pay any such amounts if it chooses not to do so. (emphasis supplied) Thus, clause 4.1 is not in confirmity with terms of approval. Furthermore, it is noteworthy that management of assessee company was under full and absolute control of its 23 parent company YRIPL. Be it also noted that participation of franchisees in management of assessee company was again subject to approval by YRIPL, which falls within its sole discretion. Clause 7.1 of Tripartite Agreement reads thus: 7.1 management and operations of TRIM will be carried out by its Board of Directors in accordance with Articles of Association of TRIM, terms of which shall be read as part of this Agreement. Board of Directors of TRIM will be nominated by Tricon from time to time in accordance with Articles of Association of TRIM. Board of Directors of TRIM shall consist of minimum number of five directors. Out of five directors Tricon may, in its absolute and sole discretion, nominate one representative each of two franchisees (to be selected by Tricon on rational basis) to be appointed as directors on Board of Directors of TRIM such nominees to hold office for period of one year from date of their appointment. In event representative of Franchisee is nominated to Board of Directors of TRIM. Franchisee agrees and undertakes to cause such representative to (i) accept such appointment as and when same is made; and (ii) to resign from post of Director on expiry of one year from date of appointment or earlier, if so requested by Tricon. (emphasis supplied) 25. net effect of aforequoted clauses is to render pre conditions for grant of approval, as otiose. It also becomes amply clear that YRIPL and franchisees stand on two substantially different footings. For, franchisees are obligated to contribute fixed percentage for conduct of AMP activities whereas YRIPL is under no such obligation in utter violation of terms of SIA approval. Moreover, even upon 24 request for grant of funds by assessee company, YRIPL is not bound to accede to request and enjoys sole and absolute discretion to decide against such request. That members of financial concern exercise mutual control over its management without scope of prejudicial exercise of power by one class of members over others is quintessence for existence of mutual concern. word mutual offers guidance to this effect. Literally understood, word mutual points towards reciprocity and mutual arrangement is one in which members/parties have reciprocal rights or understanding or arrangement. arrangement wherein one member is subjected to absolute discretion of another, in such manner that entire liability may fall upon one whereas benefits are reaped by all, is antithesis to mutual character in eyes of law. 26. contention advanced by appellant that it is not mandatory for every member of mutual concern to contribute to common pool fails to advance case of appellant. It is no doubt true that every member of mutual concern might not be required to contribute to common pool at all times. However, it does not mean that one member cannot be made to 25 contribute under any pretext whatsoever. For, that would amount to grant of overriding position to member in mutual agreement, extending upto even overruling requests for contribution from other members for mutual necessity. It is this all pervasive overriding position of one member over others that negates effect of mutuality. There is fine line of distinction between absence of obligation and presence of overriding discretion. In present case, YRIPL enjoys latter at detriment of franchisees of purported undertaking, both in matters of contribution and management. In mutual concern, it is no doubt true that obligation to pay may or may not be there, but in same breath, it is equally true that overriding discretion of one member over others cannot be sustained, in order to preserve real essence of mutuality wherein members contribute for mutual benefit of all and not of one at cost of others. 27. More importantly, examination of judicial decisions relied upon by parties brings out settled legal position that in order to qualify as mutual concern, contributors to common fund either acquire right to participate in 26 surplus or entitlement to get back remaining proportion of their respective contributions. In present scheme of things, clause 8.4 provides that, 8.4 In event there is any surplus left over in any of Brand Funds at end of Accounting Period. TRIM shall be entitled to retain surplus to be spent on AMP activities during following Accounting Period. Alternatively, TRIM may, subject to approval of its Board of Directors, refund surplus amounts to franchisees including Franchisee in same proportion as actual Advertising Contribution made by each franchisee including Franchisee in that Accounting Period. (emphasis supplied) 28. Contrary to abovestated legal position, clause 8.4 makes it clear that franchisees do not enjoy any entitlement or right on surplus remaining after operations have been carried out for given assessment year. clause provides that assessee company may refund surplus subject to approval of its Board of Directors. It implies that franchisees/contributors cannot claim refund of their remaining amount as matter of right. Be it noted that raison d etre behind refund of surplus to contributors or mandatory utilisation of same in subsequent assessment year is to reduce their burden of contribution in next year proportionate to surplus remaining from previous year. 27 Thus, fulfilment of this condition becomes essential. In present case, even if any surplus is remaining in given assessment year, it is unlikely to reduce liability of franchisees in following year as their liability to extent of 5 per cent is fixed and non negotiable, irrespective of whether any funds are surplus in previous year. only entity that could derive any benefit from surplus funds is YRIPL, i.e. parent company. This is antithetical to third test of mutuality. 29. `Be that as it may, dispensation predicated in Tripartite Agreement may entail in situation where YRIPL would not contribute even single penny to common pool and yet be able to derive profits in form of royalties out of purported mutual operations, created from fixed 5 per cent contribution made by franchisees. This would be nothing short of derivation of gains/profits out of inputs supplied by others. That cannot be countenanced as being violative of basic essence of mutuality. doctrine of mutuality, in principle, entails that there should not be any profit earning motive, either directly or indirectly. third test of mutuality, quoted above, requires that purported mutual operations 28 must be marked by impossibility of profits and this crucial test is also not fulfilled in present case. 30. Furthermore, exemption granted to mutual concern is premised on assumption that concern is being run for mutual benefit of contributors and contributions made by members ought to be directed in that direction. Contrary to this fundamental tenet, clause 8.1 of Tripartite Agreement relieves assessee company from any specific obligation of spending amounts received by way of contributions for benefit of contributors. It explicates that assessee company does not hold such amount under any implied trust for franchisees, and reads thus : 8.1 .... Notwithstanding foregoing, any amount paid by Franchisee to TRIM will not be required to be spent for specific benefit, either direct or indirect, of Franchisee or Business and no express or implied trust will be created in respect of such amount. Additionally, Franchisee will not have any claim or action against Tricon and/or TRIM in connection with level of success of any such advertising, marketing, promotion, research or test. 31. priori, it must follow that assessee company had acted in contravention of terms of approval. Notably, SIA approval or Government approval was not only binding document but also conditional document with defined set of 29 preconditions for functioning of assessee company as mutual concern. SIA approval categorically reads that grant of approval is subject to terms and conditions specified therein and any contravention thereof would be infraction of mandate of government approval. 32. appellant had urged that no fixed percentage of contribution could be imputed upon YRIPL as it does not operate any restaurant directly and thus, actual volume of sales cannot be determined. At very outset, this argument holds no water as YRIPL receives fixed percentage of royalty from franchisees on sales. We say so because if franchisees could be obligated with fixed percentage of contribution, 5 per cent in present case, it is unfathomable as to why same obligation ought not to apply to YRIPL. 33. Be it noted that text of Tripartite Agreement points towards true intent of formation of assessee company as step down subsidiary. For, clause C predicates thus: C. TRIM has been established as wholly owned step down subsidiary Tricon to manage of retail restaurant business, advertising medial and promotion at regional level and national level of KFC. Pizza Hut and other brands currently owned or acquired in future by Tricon and on its parents and of its associate company. 30 In absence of any ambiguity, terms of contract are to be understood in their ordinary and natural sense, thus revealing true intent of contracting parties. aforequoted clause clearly points towards fact that assessee company was formed to manage business on behalf of holding company. In its true form, it was not contemplated as non business concern because operations integral to functioning of business were entrusted to it. 34. doctrine of mutuality bestows special status to qualify for exemption from tax liability. It is settled proposition of law that exemptions are to be put to strict interpretation. appellant having failed to fulfil stipulations and to prove existence of mutuality, question of extending exemption from tax liability to appellant, that too at cost of public exchequer, does not arise. Taking any other view would entail in stretching limits of construction. In Law of Taxation by Thomas M. Cooley8, rule regarding strict construction of exemptions is succinctly summarised thus: 672. Strict construction Rule stated. intention on part of legislature to grant exemption from 8 Thomas M. Cooley, Law of Taxation, 4th Edition, Volume 2, Pg. 671 31 taxing power of state will never be implied from language which will admit of any other reasonable construction. Such intention must be expressed in clear and unmistakable terms, or must appear by necessary implication from language used, for it is well settled principle that, when special privilege or exemption is claimed under statute, charter or act of incorporation, it is to be construed strictly against property owner and in favour of public. This principle applies with peculiar force to claim of exemption from taxation. Exemptions are never presumed, burden is on claimant to establish clearly his right to exemption, and alleged grant of exemption will be strictly construed and cannot be made out by inference or implication but must be beyond reasonable doubt. ....... Moreover, if exemption is found to exist, it must not be enlarged by construction, since reasonable presumption is that state has granted in express terms all it intended to grant at all, and that unless privilege is limited to very terms of statute favour would be extended beyond what was meant 35. assessee company has relied upon reported decisions to establish parallel between operations carried out by itself and clubs. Upon closer scrutiny, however, we find that authorities cited by appellant do not advance its case because of structural differences between operations carried out by purported mutual concern (assessee company) and clubs. In case of clubs, operations are exempted from taxability because of underlying notion that they operate for common benefit of members wishing to enter into social exchange with no commercial intent. Further, all members of club not only have common identity in concern but also 32 stand on equal footing in terms of their rights and liabilities towards club or mutual undertaking. Such clubs are means of social intercourse, as rightly observed by CIT (A) in present case, and are not formed for facilitation of any commercial activity. On contrary, purported mutual concern in present case undertakes commercial venture wherein contributions are accepted both from members as well as non members, as discussed earlier. Moreover, one member is vested with myriad set of powers to control functioning and interests of other members (franchisees), even to their detriment. Such assimilation cannot be termed as case of ordinary social intercourse devoid of commerciality. Re: question No. (ii): 36. Once it is conclusively determined that assessee company had not operated as mutual concern, there would be no question of extending exemption from tax liability. Be that as it may, to support alternative claim for exemption, assessee company took plea in written submissions that it was acting under Trust for contributors, and was under overriding obligation to spend amounts received for 33 advertising, marketing and promotional activities. It is urged that once incoming amount is earmarked for obligation, it does not become income in hands of assessee as no occasion for application of such income arises. 37. In written submissions, assessee company has contended thus: Hon ble High Court further erred in not adjudicating specific ground raised by Appellant that contributions received by Appellant cannot be said to be its income because Appellant merely holds them as trustee and also under overriding obligation to spend such contributions received for AMP activities. 38. law on what amounts to case of diversion before accrual and what amounts to application post accrual is well settled and can be summarised by making reference to Dalmia Cement Ltd., Rajasthan v. Commissioner of Income Tax, New Delhi9, wherein following extract of Commissioner of Income Tax, Bombay City II v. Sitaldas Tirathdas10 was quoted with approval: 16 In our opinion, true test is whether amount sought to be deducted, in truth, never reached assessee as his income. Obligations, no doubt, there are in every case, but it is nature of obligation which is decisive fact. There is difference between amount which person is obliged to apply out of his 9 (1999) 4 SCC 124 10 AIR 1961 SC 728 34 income and amount which by nature of obligation cannot be said to be part of income of assessee. Whereby obligation income is diverted before it reaches assessee, it is deductible; but where income is required to be applied to discharge obligation after such income reaches assessee, same consequence, in law, does not follow. It is first kind of payment which can truly be excused and not second. second payment is merely obligation to pay another portion of one's own income, which has been received and is since applied. first is case in which income never reaches assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of person to whom it is payable... Furthermore, in Associated Power Co. Ltd. v. Commissioner of Income Tax11, this Court again observed thus: 13. application of doctrine of diversion of income by reason of over riding title is quite inapposite. doctrine applies when, by reason of over riding title or obligation, income is diverted and never reaches person in whose hands it is sought to be assessed... Similarly, in Commissioner of Income Tax, Kerala, Ernakulam v. Travancore Sugars & Chemical Ltd. 12, this Court restated thus: 22 It is thus clear that where by obligation income is diverted before it reaches assessee, it is deductible. But, where income is required to be applied to discharge obligation after such income reaches assessee it is merely case of application of income to satisfy obligation of payment and is therefore not deductible. 39. CIT (A), while rejecting this ground, relied upon Sitaldas Tirathdas (supra), and observed thus: 11 (1996) 7 SCC 221 12 (1973) 3 SCC 274 35 ... Where assessee applies income to discharge obligation after income reaches hands of assessee, it would be application of income and this would resulting taxation of such income in hands of appellant. 40. We note that same ground was also pressed in appeal before Tribunal which finds mention in Tribunal s order dated 31.01.2008 in following words: (b) In failing to consider and appreciate that amount received by appellant from franchisees towards advertising contributions are diverted at source by overriding title for being spent on advertisement .. However, Tribunal did not record any observation addressing this ground in abovesaid order. It has been brought to our notice that assessee company has made application under section 254(2) of 1961 Act for rectification of Tribunal s order citing error apparent on face of record. said application is stated to be pending. 41. Considering fact that question of diversion by overriding title was neither framed nor agitated in appeal memo before High Court or before this Court (except brief mention in written submissions), coupled with fact that neither Tribunal nor High Court has dealt with that plea and that rectification application raising that ground is still undecided and stated to be pending before Tribunal, we deem 36 it appropriate to leave it open to appellant to pursue rectification application, if so advised. We may not be understood to have expressed any opinion either way as regards tenability of said application or otherwise. 42. In view of aforestated terms, questions posed for our consideration stand answered against appellant (assessee company) and in favour of Revenue and appeal stands disposed of upholding impugned judgment with liberty to appellant to pursue remedy of rectification, as per law. There shall be no order as to costs. Pending interlocutory applications, if any, shall also stand disposed of. ..................................J. (A.M. Khanwilkar) ..................................J. (Dinesh Maheshwari) New Delhi; April 24, 2020. Yum! Restaurants (Marketing) Private Limited v. Commissioner of Income-tax, Delhi