Uday Sinha, J.:— The questions referred for opinion of this court are:

“(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in not allowing exemption in respect of profit arising out of dealings between the society and its members on the ground of mutuality?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that subsidy and grants received from different companies are revenue receipts and taxable under the Income-tax Act?”

2. Taxation Case No. 123 of 1975 relates to the assessment year 1969-70. Taxation Cases Nos. 124 to 126 of 1975 relate to the assessment years 1966-67, 1967-68 and 1968-69. The assessee is a co-operative society registered under the Bihar and Orissa Co-operative Societies Act. Its objects, amongst others, were the following:

“(i) To assist the members of the Society in purchasing at reasonable rates such commodities as are generally required by them.

(ii) To sell and supply to the members of the Society and the employees of the Tata Iron and Steel Co. Limited and of the associated and subsidiary companies in Jamshedpur and Tatanagar, grain, foodstuffs, bazar supplies, cloth, piecegoods, articles of household consumption or use and other necessaries of life of good quality at economic prices.

(iii) To accept gifts or contributions either by way of donation periodically or other subscriptions or otherwise for the support and furtherance of the objects of the Society and in case of such contributions, donations, subscriptions, legacies and other moneys for such purposes as aforesaid upon or subject to special terms and conditions which are not inconsistent with the objects of the Society.”

3. In the years in question, the taxing officer added profits arising out of dealings between the society and its members to the total income of the assessee. The assessee claimed that these profits should be exempt on the basis of mutuality. Another item of receipt claimed by the assessee to be exempt from taxation was subsidy received by it from Tata Iron and Steel Company (hereinafter called “the Tisco”) and other companies. The claim of the assessee did not find favour with the taxing officer nor with the Appellate Assistant Commissioner. Both of them held that both the items were to be treated as business receipts in the hands of the assessee and liable to be taxed as such. The assessee agitated the matter in appeal before the Appellate Tribunal as well, though unsuccessfully. The Tribunal held as a fact that since the society traded with its members and others and the surplus out of the common fund was distributable among the members, there was no mutuality. The surplus was thus assessable as profits, as there was no complete identity between the contributors and the participators inasmuch as members who have not contributed to the surplus as customers were nevertheless entitled to participate in the surplus. The claim of the assessee thus fell through before the Tribunal as well. An application for reference to this court having been made to the Tribunal, the present references under section 256(1) of the Income-tax Act have been made for the opinion of this court.

4. The questions referred to this court must be decided on the basis of the ratio of the decision of the Supreme Court in Cit, Bombay City v. Royal Western India Turf Club Ltd. , [1953] 24 ITR 551 and CIT v. Kumbakonam Mutual Benefit Fund Ltd., [1964] 53 ITR 241. In the said two cases, the Supreme Court analysed how far the principle of mutuality was available to the members of a Society.

5. In the case of Royal Western India Turf Club Limited, [1953] 24 ITR 551, their Lordships of the Supreme Court held that the principles laid down in New York Life Insurance Co. v. Styles, [1889] 2 TC 460; LR 14 AC 381 (HL) cannot apply to an incorporated company. Their Lordships observed that in the case before them, there was no mutual dealing between the members inter se and no putting up of a common fund for discharging common obligations to each other undertaken by the contributors for their mutual benefit. On the contrary, the assessee being an incorporated company was authorised to carry on co-operative business of a race course company and that of licensed victuallers and refreshment purveyors and in fact carrying on such a business. In that case also, dealings of the company with non-members used to take place in the ordinary course of business carried on with a view to earning profits as in any other commercial concern. The company gave to its members the same or similar amenities as it gave to non-members, namely, the use of an unreserved seat in a stand, the facility to watch the races and to bet on the horses in the races, the use of the totalisator in that stand and the facility for refreshment. The admission fee for members’ enclosure was exactly the same as that for admission to non-members. The dealings in both the cases disclosed the same profit-earning motive and were tainted alike with commerciality. S.R Das J., as he then was, distinguishing New York Lift Insurance Co. v. Styles, [1889] 2 TC 460; LR 14 AC 381 (HL), observed that the principle that no one can make a profit out of himself is true enough, but may in its application easily lead to confusion. According to his Lordship, there was nothing per se to prevent a company from making a profit out of its members. The following observation of S.R Das J. is rather poignant (p. 560 of 24 ITR):

“It is clear to us that those principles cannot apply to an incorporated company which carries on the business of horse racing and realises money both from the members and from non-members for the same consideration, namely, by the giving of the same or similar facilities to all alike in course of one and the same business carried on by it.”

6. With those observations, the Supreme Court answered the reference in favour of the Department and against the assessee.

7. The above case was followed by the Supreme Court in the case of CIT v. Kumbakonam Mutual Benefit Fund Ltd., [1964] 53 ITR 241, where again the Supreme Court observed that the essence of mutuality lies in the return of what one has contributed to a common fund, and since there was want of complete identity between the contributors and the participators in a common fund, the principle of mutuality was not attracted. His Lordship observed that a shareholder in the assessee company was Entitled to participate in the profits without contributing to the funds of the company by taking loans. His position was in no way different from that of a shareholder in a banking company limited by shares. Except that it lent money to and received deposits from its shareholders, that did not by itself make its income any the less the income of the company from business within the meaning of section 10 of the Indian Income-tax Act, 1922.

8. The parameter in regard to mutuality having been set down by the Supreme Court in the two cases referred to above, let us analyse how matters stand in the instant case. The outstanding features are that membership of the society (the assessee) was open to the employees of the Tisco Ltd. and also employees of associated and subsidiary companies in Jamshedpur and Tatanagar. The object of the society included sale and supply to the members of the Society and employees of the Tata Iron and Steel Company Limited and of the associated and subsidiary companies in Jamshedpur and Tatanagar. The Society thus sold consumer goods not only to members but also to nonmembers. Similarly, the Society was authorised to open and provide restaurants and refreshment rooms for the benefit of the members and the employees of the company mentioned above. Further, the Society was authorised to take on lease or in exchange, hire by way of purchase or otherwise acquire, any immovable or movable property necessary or convenient for the purpose of the society. The membership of the Society was open not only to the employees of Tisco, but also co-operative societies registered under the Bihar and Orissa Co-operative Societies Act, 1935, and situated in Jamshedpur and Tatanagar and their paid employees. The liability of a member for the debts of the Society was limited to the face value of the shares actually held by him less the amount paid by him on such shares. Rule 52 of the bye-laws of the Society lays down that all sales shall ordinarily be for cash and may, at the discretion of the managing committee, be made to non-members also. It is not in controversy that members as well as non-members were buying from the co-operative society shops. The contributions to the fund were thus of members as well as of non-members. Dividends on shares were to be distributed to members. The above features are to be found in the bye-laws of the assessee which is annexure E to the reference. The above leave no manner of doubt that there was no common fund. The participators in the dividends may not have contributed to its funds. The members were receiving facilities which were same or similar as were received non-members. The participators in the dividends were only shareholders. The Society was thus indulging in commercial transactions. By the test laid down in the two Supreme Court decisions, referred to above, there was complete want of mutuality. That being so, the profits of the Society from sales to members were also liable to be added to its total income.

9. The reliance placed by learned counsel for the assessee on Commissioner Of Income-Tax, Bihar v. Bankipur Club Ltd., [1981] 129 ITR 787 (Pat) is entirely misplaced. That was a case in regard to the profits of Bankipur Club at Patna. The outstanding feature, however, which makes all the difference between the case before us and Bankipur Club, [1981] 129 ITR 787 (Pat) was that the activities of the club were confined to members alone. Nobody was allowed to enjoy the privileges of the club other than its members, The bar where drinks were sold was open to its members alone and no outsider could purchase drinks from the club. The members paid monthly, subscriptions and in addition they enjoyed the benefit of supply of drinks. The profits are on additional payment. On those facts, S.K Choudhuri J. rightly held, with respect, that there was no profit motive so far as transaction oi sale of drinks was concerned. The club was owned by the members and so the transactions would amount to sale to members themselves. All the funds of the club were applied for adding further privileges to the members The profit was, therefore, entitled to exemption on the doctrine oi mutuality. Bankipur Club's case, [1981] 129 ITR 787 is entirely distil guishable. The case of Presidency Club Ltd. v. CIT, [1981] 127 ITR 264 (Mad is similar to Bankipur Club's case, [1981] 129 ITR 787 and is distinguishable from the case before us for the same reason as indicated above.

10. Reliance placed by learned, counsel for the assessee on State of Gujarat v. Raipur Manufacturing Co. Ltd., [1967] 19 STC 1 (SC) again in entirely misplaced. The Madras case in CIT v. Madras Race CM [1976] 105 ITR 433 also cannot be of any help to the assessee. In that case also, the claim for exemption was rejected, as there was want of mutuality. I shall content myself by observing that the point falling for cnsideration in that case was entirely different and no case of mutuality irose in it. That case falls in the category of cases like CIT v. Merchant. Navy Club, [1974] 96 ITR 261 (AP). The case before us falls in the category of Royal Calcutta Turf Club v. Secretary of State for India in Council, [1921] 1 ITC 108, National Association of Local Government Officers v. Watkins, [1934] 18 TC 499 and that of Cit, Bombay City v. Royal Western India Turf Club Ltd. , [1953] 24 ITR 551 (SC). With all discussions on the subject before as, in my concluded opinion, profits of the Society from sales to members would certainly be includible in the taxable income of the Society.

11. Subsidy and grants.— The next question on which our opinion has been sought is whether the Appellate Tribunal was justified in holding that subsidy and grants received from different companies were revenue receipts and taxable under the Income-tax Act. Bye-law 3(v) of the assessee shows that one of the objects of the Society besides others was to accept gifts or on tributions either by way of donation periodically or other subscriptions or otherwise for the support and furtherance of the objects of the Society, The Tribunal found that, from the very inception of the assessee, Tisco and other subsidy companies had been regularly contributing to the Society for the benefit of their employees, who are the main beneficiaries of the Co-operative Society. These payments had been made by the companies on their own sweet will and there was no rule or law binding them to make such payments. The payments to the assessee had been made in a regular, manner month after month and were not without consideration. The company had considered such payments as part of their labour welfare activities. The Tribunal held that the payments which had been received in the course of business and towards fulfilment of the objects of the society could not be considered to be casual or capital receipts in the hands of the Society. They were accepted regularly by the assessee and the source was connected with the normal business activity of their Society. On these facts, the Tribunal held that subsidies and grants to the Society by companies at Jamshedpur must be held to be revenue receipts and taxable as such under the Income-tax Act.

12. The sheet-anchor of the assessee in regard to the subsidy and grants received by it is Circular No. 142 dated August 1, 1974, of the Central Board of Direct Taxes which reads as follows ([1974] 95 ITR (St) 151):

“Circular No. 142, dated August 1, 1974.

Subject: Taxability of subsidy:—Revenue receipt or capital receipt—

‘10 per cent. Central Outright Grant of Subsidy Scheme, 1971’—Clarification regarding.

The Board had occasion to consider whether the amount of subsidy received under 10% Central Outright Grant of Subsidy Scheme for industrial units to be set up in certain selected backward districts/areas would constitute revenue receipt or capital receipt in the hands of the recipient for the purpose of income-tax.

2. I am directed to say that the payment of subsidy under the scheme is primarily given for helping the growth of industries and not for supplementing their profits. Under the scheme, the quantum of subsidy is determined with reference to the fixed capital and not the profit. The working capital has been specifically excluded from the computation of fixed capital for this purpose. One of the conditions for the grant of the subsidy is that the undertaking must remain in production at least for a period of five years after it goes into production. Since the subsidy is intended to be a contribution towards capital outlay of the industrial unit, the Board are advised that such subsidy can be regarded as being in the nature of capital receipt in the hands of the recipient.”

13. I regret, the Board's circular cannot be of any avail to the assessee. The subsidy or grant contemplated by the Board is entirely different from the subsidy or grant received by the assessee in the case before us. The Board was dealing with subsidies for helping the growth of industries and not for supplementing profits. The subsidy had direct relationship with the fixed capital. The last sentence of the circular is rather telling. The situation contemplated is that subsidy is intended to be a contribution towards capital outlay of the industrial unit. Such subsidy was recommended by the Board to be regarded as capital receipt in the hands of the recipient. The character of the subsidy or grant in the case before us is entirely different. They are not meant for the growth of any industry. They have no nexus with the fixed capital. The assessee-society received it month after month. The objective was welfare of the workers of the industry in extending the subsidy. The growth of the industry was not the consideration. The reliance placed by the assessee on Board's Circular No. 142 dated August 1, 1974, is, therefore, entirely misplaced. [See M/S. Delhi Flour Mills Co. Ltd.… v. Commissioner Of Income-Tax…, [1974] 95 ITR 151 (Delhi)].

14. The fact that a receipt of money is described as subsidy or grant is not conclusive of the question whether the sums received are capital receipts or revenue receipts. In Dhrangadhra Chemical Works Ltd. v. CIT, [1977] 106 ITR 473, a Division Bench of the Bombay High Court was called upon to decide whether certain sums received by the assessee from the Government in a regular manner was revenue receipt liable to tax or capital receipt. The grant/subsidy had been given with the sole object of enabling the assessee company to carry on their business in a commercial manner so that it would yield profits. On those facts, Kantawala C.J observed that the subsidy could not be regarded as capital or non-recurring in nature. The subsidy so received was thus not exempt from taxation. I am in respectful agreement with the decision of Kantawala C.J

15. I am of the view that profits of the assessee from sales to members and subsidy to it are liable to be taxed as income in the hands of the assessee. For the reasons stated above, the Appellate Tribunal was justified in rejecting the claim of the assessee on both counts. Both the questions referred to this court are, therefore, answered in the affirmative, in favour of the Department and against the assessee. There shall, however, be no order as to costs.

Nazir Ahmad, J.:— I agree.