TaxTMI 
TaxTMI 
2020 (4) TMI 827
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....our thousand two only), being the excess of income over expenditure for the Assessment Year 2001-02, was settled in favour of the Revenue and against the assessee, thereby confirming the orders of the Income Tax Appellate Tribunal (for short, "the Tribunal"), Commissioner of Income Tax (Appeals) [for short, the "CIT(A)"] and the Assessing Officer. The preceding forums, without any exception, have returned consistent verdicts refusing to acknowledge the assessee company as a mutual concern and denying any exemption from taxability. 3. The 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 the Secretariat for Industrial Assistance (for short "SIA") for the purpose of economisation of the cost of advertising and promotion of the franchisees as per their needs. The approval was granted subject to certain conditions as regards the functioning of assessee, whereby it was obligated to operate on a non-profit basis on the principles of mutuality. The relevant clauses of the approval granted by the SIA for the aforementioned oper....
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....f Revenues for a particular month into the Bank account of the Brand Fund established by TRIM by the 10th day of the following month. Details of the bank account, of each Brand Fund set up by TRIM will notified to Franchisee by TRIM from time to time. Notwithstanding the aforesaid, the executive committee of any Brand (constituted under Article 7 of this Agreement) may, by a three fourth majority, which shall be binding on all franchisees of Tricon including the Franchisee, require the franchisee to pay the advertising Contribution in advance. For the avoidance of doubt it is clarified and agreed that while recommending advance payment of Advertising Contribution the chairman will not have a casting vote. Franchise will spend an additional 1% of Revenues, in the 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 the relevant Accounting Period, in accordance with the requirements and guidelines set out in the Manuals, provided that if Franchisee fails to spend the full amount as directed by Tricon and/o....
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....nue to YRMPL. However as per clause 4.1 of Tripartite operating agreement submitted by YRMPL, the 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. The imposition of liability by the Assessing Officer was upheld by the C.I.T. (A) on the ground of taint of commerciality in the activities undertaken by the assessee company, wherein it was observed thus: "1.14 ....The AMP activity is quite a critical component of running a successful business venture, it is intrinsically linked to sales and profit of the franchisees the contributors. Accordingly it cannot be said that such activity is immune from the taint of commerciality. Unlike in the cases of a club, the appellant Co. is not existing for any social inter course nor is it for cultural activities where the idea of profit or trade does not exist. What is essential is that there should not be any dealing with outside body wh....
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....ity cannot be applied. It is a different facts that the assessee was established with the object not to make profit but it is also a fact that there is a surplus in the hands of the assessee which arose due to contribution from certain persons who were neither the benficiaries nor have right to receive the surplus...." (emphasis supplied) 8. The consistent line of opinion recorded by the aforementioned three forums was further approved in appeal by the High Court vide impugned judgment, by observing thus: "8. ....The principle of mutuality as enunciated by the Courts in various cases is applicable to a situation where the income of the mutual concern is the contributions received from its contributors. The expenses incurred by the mutual concerns are incurred from such contributions and hence on the principle that no man can do business with himself, the excess of income over expenditure is not amenable to tax. However, in the present case the authorities below have returned a finding of fact that the fund as contributors such as Pepsi Food Ltd which do not benefit from the APM Activities. Moreover, the principle of mutuality is applicable to those entities who....
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....each member should contribute to the common fund or that the benefits must be derived by the beneficiaries in the same manner or to the same extent. Reliance has been placed by the appellant upon reported decisions to draw a parallel between the functioning of the assessee company and clubs to support the presence of mutuality. 12. The Revenue/respondent has countered the submissions made by the assessee company by submitting that the moment a nonmember joins the common pool of funds created for the benefit of the contributors, the taint of commerciality begins and mutuality ceases to exist in the eyes of law. It has been submitted that the assessee company operated in contravention of the SIA approval as contributions were received from Pepsi, despite it not being a member of the brand fund. To buttress this submission, it is urged that once the basic purpose of benefiting the actual contributors is lost, mutuality stands wiped out. 13. We have heard Mr. Balbir Singh, learned senior counsel for the appellant and Mr. V. Shekhar, learned senior counsel for the respondent. Re: Question (i): 14. The doctrine of mutuality traces its origin from the basic principle that a ma....
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....on's Taxes Simon's Taxes, Volume B, 3rd Edition, Pgs. 159, 167: "... it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a 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 the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered..." 16. In order to undertake the examination of mutuality, we gainfully advert to The English and Scottish Joint Cooperative Wholesale Society Ltd. v. Commissioner of Agricultural Income Tax, Assam AIR 1948 PC 142, which has been quoted with approval by this Court in Commissioner of Income Tax, Bombay City v. Royal Western India Turf Club Ltd. AIR 1954 SC 85 and Bangalore Club (supra). The afore....
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....cipation in the mutual fund as the transaction fructifies. Any such alteration would lead to the nonuniform participation of an external element or entity in the transaction, thereby opening the scope for a manifest or latent profitbased dealing in the transaction with parties outside the closed circuit of members. It would be amenable to income tax as per Section 2(24) of the 1961 Act. Completeness of Identity 18. Coterminous with the requirement of common identity, as discussed above, the law also contemplates a completeness of identity between the contributors and participators. The theory of completeness of identity presupposes the contributors and participators to be two separate classes, but there is oneness or equality in the matter of sharing of surplus/profits. This is to ensure that there is no interference of any alien commercial entity in the transaction. With the interference of any alien entity, the 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 Encyclopaedia - British Tax Encyclopedia (I), 1962 Edition, Pgs. 1200 and....
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....artite mutual arrangement so as to qualify as a beneficiary of the mutual operations. The definition clause of the Tripartite Agreement adds weight to this finding. "Advertising Contribution", as defined in the definition clause means, "the advertising contributions which Franchisee has agreed to pay to Tricon pursuant to [sic] the Franchisee Agreements." Furthermore, "Franchise Agreements", as defined in the definition clause, means agreements executed between Tricon and Franchisee. As a corollary, what follows is that for any amount received by the assessee company to be treated as an advertising contribution, it must be paid by a franchisee, that too in the aftermath of a prior franchisee agreement to that effect. In the light of the prevailing relationship, there is no such franchisee agreement between Tricon or TRIM and Pepsi Foods Ltd. and therefore, the amounts received from Pepsi Foods Ltd. cannot be viewed as advertising contributions "from a member of the mutual undertaking" as such. 21. In the present case, therefore, the assessee company is realising money both from the members as well as non-members in the course of the same activity carried on by it. Th....
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....s and obedience to the mandate. The mandate of the assessee company was laid down in the SIA approval wherein the twin conditions of mutuality and non-profiteering were envisioned as the sine qua non for the functioning of the assessee company. The contributions made by Pepsi Foods Ltd. tainted the operations of the assessee company with commerciality and concomitantly contravened the prerequisites of mutuality and non-profiteering. 24. The mutuality and non-profiteering character of a concern are to be determined in light of its actual working structure and the factum of corporation or incorporation or the form in which it is clothed is immaterial. It is, therefore, imperative to examine the actual functional framework of the assessee company in light of the status of YRIPL (parent company) vis a vis other members/franchisees. As per the terms of the SIA approval, YRIPL and franchisees were equally obligated to make contribution of a fixed percentage to the assessee company. This requirement was incorporated as a precondition for the grant of permission to operate as a mutual concern. Clause 3 of the approval letter reads thus: "The franchises and Tricon Indian will bo....
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....the aforequoted clauses is to render the preconditions for the grant of approval, as otiose. It also becomes amply clear that YRIPL and the franchisees stand on two substantially different footings. For, the franchisees are obligated to contribute a fixed percentage for the conduct of AMP activities whereas YRIPL is under no such obligation in utter violation of the terms of SIA approval. Moreover, even upon request for the grant of funds by the assessee company, YRIPL is not bound to accede to the request and enjoys a "sole and absolute" discretion to decide against such request. That members of a financial concern exercise mutual control over its management without the scope of prejudicial exercise of power by one class of members over the others is the quintessence for the existence of a mutual concern. The word "mutual" offers guidance to this effect. Literally understood, the word "mutual" points towards reciprocity and a mutual arrangement is one in which the members/parties have reciprocal rights or understanding or arrangement. An arrangement wherein one member is subjected to the absolute discretion of another, in such a manner that the entire liability may fall upon one w....
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....ed) 28. Contrary to the above stated legal position, clause 8.4 makes it clear that the franchisees do not enjoy any "entitlement" or "right" on the surplus remaining after the operations have been carried out for a given assessment year. The clause provides that the assessee company may refund the surplus subject to the approval of its Board of Directors. It implies that the franchisees/contributors cannot claim a refund of their remaining amount as a matter of right. Be it noted that the raison d'etre behind the refund of surplus to the contributors or mandatory utilisation of the same in the subsequent assessment year is to reduce their burden of contribution in the next year proportionate to the surplus remaining from the previous year. Thus, the fulfilment of this condition becomes essential. In the present case, even if any surplus is remaining in a given assessment year, it is unlikely to reduce the liability of the franchisees in the following year as their liability to the extent of 5 per cent is fixed and non-negotiable, irrespective of whether any funds are surplus in the previous year. The only entity that could derive any benefit from the surplus funds is YRIPL, i.e....
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....ubject to the terms and conditions specified therein and any contravention thereof would be infraction of the mandate of the government approval. 32. The appellant had urged that no fixed percentage of contribution could be imputed upon YRIPL as it does not operate any restaurant directly and thus, the actual volume of sales cannot be determined. At the very outset, this argument holds no water as YRIPL receives fixed percentage of royalty from the franchisees on the sales. We say so because if the franchisees could be obligated with a fixed percentage of contribution, 5 per cent in the present case, it is unfathomable as to why the same obligation ought not to apply to YRIPL. 33. Be it noted that the text of the Tripartite Agreement points towards the true intent of the formation of the assessee company as a step down subsidiary. For, clause C predicates thus: "C. TRIM has been established as a wholly owned step down subsidiary Tricon to manage of the retail restaurant business, the 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 ass....
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....ute the favour would be extended beyond what was meant..." 35. The assessee company has relied upon reported decisions to establish a parallel between the operations carried out by itself and clubs. Upon closer scrutiny, however, we find that the authorities cited by the appellant do not advance its case because of the structural differences between the operations carried out by the purported mutual concern (assessee company) and clubs. In the case of clubs, the operations are exempted from taxability because of the underlying notion that they operate for the common benefit of the members wishing to enter into a social exchange with no commercial intent. Further, all the members of the club not only have a common identity in the concern but also stand on an equal footing in terms of their rights and liabilities towards the club or the mutual undertaking. Such clubs are a means of social intercourse, as rightly observed by CIT (A) in the present case, and are not formed for the facilitation of any commercial activity. On the contrary, the purported mutual concern in the present case undertakes a commercial venture wherein contributions are accepted both from the members as well a....
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....equired to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable..." Furthermore, in Associated Power Co. Ltd. v. Commissioner of Income Tax (1996) 7 SCC 221, this Court again observed thus: "13. The application of the doctrine of diversion of income by reason of an overriding title is quite inapposite. The doctrine applies when, by reason of an overriding title or obligation, income is diverted and never reaches the person in whose hands it is sought to be assessed..." Similarly, in The Commissioner of Income Tax, Kerala, Ernakulam v. The Travancore Sugars & Chemical Ltd. (1973) 3 SCC 274, this Court restated thus: "22... It is thus clear that where by the obligation income is diver....