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PETITIONER: DELHI STOCK EXCHANGE ASSOCIATION LTD.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, DELHI

DATE OF JUDGMENT: 30/11/1960

BENCH: KAPUR, J.L. BENCH: 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.

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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.

JUDGMENT: 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

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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

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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

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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.