Delhi Stock Exchange Association Ltd vs Commissioner Of Income Tax, Delhi

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeals Nos. 187 and 190 of 1960

Decision Date: 30 November 1960

Coram: J.L. Kapur, M. Hidayatullah, J.C. Shah

In this matter, the Supreme Court of India considered an appeal brought by Delhi Stock Exchange Association Ltd against a judgment of the High Court of Delhi dated 30 November 1960. The bench hearing the appeal comprised Justice J.L. Kapur, Justice M. Hidayatullah and Justice J.C. Shah. The petition was recorded under the citation 1961 AIR 1144 and 1961 SCR (2) 798. The issue concerned the applicability of the Income‑Tax Act to a company that operated a stock exchange and dealt in shares, specifically whether the admission fees collected from members and authorised assistants constituted taxable income.

The Court noted that the appellant company had been incorporated with the purpose of promoting, regulating and facilitating business in shares, stocks, securities and related transactions, and of establishing and operating a stock exchange. Its capital was divided into share capital on which dividends could be paid, and it owned premises where trading was conducted under its supervision. The company also framed rules governing the purchase and sale of shares within the exchange premises. During the assessment year that formed the subject of the dispute, the company’s receipts consisted chiefly of amounts received as admission fees from members and from authorised assistants. The question referred to the High Court was whether these fees, when received by the appellant, should be treated as taxable income.

The High Court answered affirmatively. It held that the appellant was not a mutual society, that dividends could be paid on its share capital, that any person could become a shareholder but would not be a member unless the admission fee was paid, and that the true object of the company was to carry on the business of a stock exchange and to earn profits. The appellant, however, argued that the membership fees were shown as capital in its books, that they were not received periodically, and therefore should be regarded as capital receipts exempt from assessment.

The Supreme Court affirmed the High Court’s decision and dismissed the appeal. The Court observed that the manner in which the appellant accounted for the amounts was immaterial; what mattered was the nature of the receipt itself. The Court held that the fee received on account of authorised assistants fell within the precedent set in Commissioner of Income‑Tax v. Calcutta Stock Exchange Association Ltd., (1959) 36 I.T.R. 222, and was therefore taxable income. Regarding the members’ admission fee, the Court stated that its taxability must be determined by examining the nature of the company’s business, its profits and the manner of their distribution as disclosed in its Memorandum and Articles of Association and the rules governing its operations. Those documents showed that the company’s income was distributable among its shareholders in the same way as in any other joint‑stock company, and that the body of trading members was distinct from the shareholders, indicating the absence of the element of mutuality.

The Court observed that the persons who paid the entrance fees were not the same as the shareholders, and therefore the necessary element of mutuality was absent. It applied the principle stated in Liverpool Corn Trade Association v Monks (1926) 2 K B 110. The Court also referred to the authorities 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 in support of its reasoning. The judgment concerned civil appellate jurisdiction over Civil Appeals Nos 187 and 190 of 1960, which were appeals from the judgment dated 22 January 1957 of the Punjab High Court (Circuit Bench), Delhi, in Civil Reference No 6 of 1953. Counsel for the appellant were Veda Vyasa, S K Kapur and K K Jain, while counsel for the respondent were B Ganapathi Iyer and D Gupta. The order was dated 30 November 1960 and was delivered by Justice Kapur.

Justice Kapur explained that the present appeals were filed by the assessee company against a common judgment and order of the Punjab High Court that had decided four appeals in Civil Reference No 6 of 1953. The appeals pertained to the assessment years 1947‑48, 1948‑49, 1949‑50 and 1950‑51. The assessments for the years 1947‑48 and 1948‑49 had been made against the appellant in its capacity as successor to two limited companies that were later merged. The appellant company had been incorporated in 1947 with the object of acquiring, as a going concern, the activities, functions and business of the Delhi Stock & Share Exchange Limited and the Delhi Stock and Share Brokers Association Limited, and of promoting and regulating the exchange of stocks, shares, debentures, government securities, bonds and equities of any description. In furtherance of this object the company intended to establish and operate a stock exchange in Delhi or elsewhere. Its authorized capital was Rs 5,00,000 divided into 250 shares of Rs 2,000 each, each share being capable of earning a dividend.

The appellant provided a building and a hall in which business would be transacted under its supervision and control, and it framed rules governing the sale and purchase of shares on its premises. For the financial year 1947‑48 the total income was Rs 29,363. From this amount a sum of Rs 15,975 identified as admission fees was deducted, resulting in a net taxable income of Rs 13,388. The profit and loss account for that year showed Members’ admission fees of Rs 9,000 and admission fees on account of Authorized Assistants of Rs 6,875. The Income‑Tax Officer who assessed the year 1947‑48 disallowed the deduction of these admission fees. The subsequent return for the year 1948‑49 was filed on a similar basis. However, the returns for the years 1949‑50 and 1950‑51 did not treat the admission fees as revenue; instead, the Director’s report indicated that the amounts received were taken directly into the balance sheet. Nevertheless, the Income‑Tax Officer again disallowed the treatment and added the admission‑fee amounts back to the income declared by the appellant. The appellant challenged these assessments by filing appeals against the orders of the Income‑Tax Officer.

In this case, the Appellate Assistant Commissioner set aside the additional assessments made under section 34 for the assessment years 1947‑48, 1948‑49 and 1949‑50, while the fourth appeal concerning the year 1950‑51 was decided against the appellant. Both parties then appealed to the Income‑tax Appellate Tribunal against the orders of the Appellate Assistant Commissioner, and the Tribunal decided all of those appeals in favour of the appellant. One member of the Tribunal held that the amounts received as entrance fees were intended to be, and in fact were, treated as capital receipts and therefore should be excluded from assessment. The other member opined that, because the receipts did not possess the requisite periodicity, they could not be taxed. The respondent subsequently instituted a case before the High Court on the question whether the admission fees of members or authorised assistants received by the assessee constituted taxable income in its hands. The High Court answered this question in favour of the respondent, holding that the appellant was not a mutual society and consequently was not exempt from income‑tax liability; it further observed that the appellant possessed a share capital on which dividends could be earned and that any person could become a shareholder by purchasing a share, but that a shareholder could not become a member unless he was enrolled, admitted or elected as a member and paid an admission fee of rupees two hundred and fifty. Upon becoming a member, the individual was entitled to exercise all rights and privileges of membership. The Court also found that the genuine object of the company was to operate as a stock exchange and to earn profits, and therefore the admission fees fell within the expression “profits and gains of business, profession or vocation”. The alternative argument that the income might fall under section 10(6) of the Act was not decided. Counsel for the appellant, Mr Veda Vyasa, contended that the appellant had only two hundred and fifty members, that the amounts received as membership fees were shown as capital in the company’s books, and that, because there was no periodicity, the amounts treated as income should have been regarded as capital receipts and thus exempt from assessment. He further argued that the question did not arise from the Tribunal’s order but was a new question, and that the objection was futile because no objection had been raised at the stage of drawing up the statement of the case nor in the High Court, rendering the objection invalid. The Court observed that the only matter in controversy requiring decision was the one properly referred by the Tribunal, and that the question had to be answered in light of the facts admitted or found by the Tribunal. The Court rejected the contention that the nature of the appellant’s business or its membership rules could be ignored, noting that the statement of the case itself showed that these matters had been considered by a member of the Tribunal and by the learned judges of the High Court, based on material placed before the income‑tax authorities and expressly referred to in their orders and again presented before the High Court. Finally, the Court held that it is immaterial how the assessee treats the monies received; what is decisive is the nature of the receipts, and the amounts in question were received as membership admission fees.

The Court rejected the proposition that the Tribunal’s findings could not consider the nature of the appellant’s business or its membership rules when answering the question. It described this argument as untenable. The record of the case demonstrated that a Tribunal member had indeed taken those matters into account, and the High Court judges had also decided the issue based on the material placed before the Income Tax authorities, which the Tribunal expressly referenced in its orders and which the appellant company reiterated before the High Court. Consequently, the Court held that how the appellant treated the amounts in question was irrelevant to the present dispute. What matters, the Court explained, is the character of the receipts, not the assessees’ method of handling the monies received. The amounts under consideration consisted of two types of fees: membership admission fees and admission fees paid by members on behalf of Authorized Assistants. The Court observed that the latter category fell within the decision of this Court in Commissioner of Income‑tax v. Calcutta Stock Exchange Association Ltd., and therefore constituted taxable income. The former category—membership admission fees—had to be examined according to the appellant’s business nature, its Memorandum and Articles of Association, and the Rules governing its operations. The appellant was an association that conducted a trade, and its profits were distributable as dividends to shareholders, as noted in the 1959 report (36 I.T.R. 222). The association’s object was to promote and regulate transactions in shares, stocks, securities and to establish and run a Stock Exchange in Delhi, facilitating such business. The Court likened this enterprise to the one described in Liverpool Corn Trade Association v. Monks, where an association was created to advance the corn trade, possessed share capital, could declare dividends, operated a corn exchange market, newsroom and related facilities, restricted membership to persons active in the corn trade, required each member to be a shareholder, and levied an entrance fee. The Association also imposed variable subscriptions based on facility usage, with the majority of its receipts derived from entrance fees and subscriptions. It was argued that such an association did not engage in trade but functioned as a mutual association, and that entrance fees and subscriptions should be excluded from taxable profit calculations. The Court held, however, that the Association was not a mutual entity whose transactions were incapable of generating profit.

In this case the Court held that the association was carrying on a trade and therefore the entrance fees paid by its members had to be treated as part of the association’s receipts for the purpose of calculating profit. Justice Rowlatt expressed this view at page 121, stating that he could not understand why the amount should not be regarded as profit. He explained that the company possessed capital on which dividends could be earned and owned assets that could be used to obtain payments from its members for the advantages of such use. He likened the situation to that of a railway company that issues a ticket to one of its own shareholders, or to a company that earns profit from transactions with its shareholders in a business that is limited to those shareholders. The quotation was taken from the decision reported in (1) 1926 2 K.B. 110. The Court also referred to the decision in Commissioner of Income‑tax, Bombay City v. Royal Western India Turf Club Ltd. (1), where it rejected the application of the principle of mutuality because there was no mutual dealing between members amongst themselves. The Court noted that the members did not create a common fund to meet a common obligation for their mutual benefit, and consequently the House of Lords case Styles v. New York Life Insurance Company (2) was held not to apply.

The present case was examined by looking at the Memorandum of Association of the appellant company. The memorandum disclosed that the company was formed with the objective of promoting and regulating the business of exchange of stocks, shares, debentures and related securities. Any income that accrued from that business was, like in any joint‑stock company, distributable among the shareholders. The Articles of Association defined members to include both shareholders and members of the exchange, and the rules and bye‑laws clarified that a “member” could be an individual, a body of individuals, a firm, a company, a corporation or any corporate body that appeared on the list of working members of the Stock Exchange at that time. Sections 7 and 8 of the Articles provided that members were to be elected by the Board of Directors, and Rules 9 and 10 set out the procedure for such election.

Entrance fees were payable only by the trading members who were elected under the Rules and Bye‑laws, and only those trading members together with their associates were authorised to transact business in stocks and shares through the association. Consequently, the group that paid entrance fees – the trading members – was not the same group that received the distributed profits – the shareholders. Because the two groups were distinct, the element of mutuality was absent. The Court clarified that what determines the tax treatment is the nature of the business, the profits generated and the manner of their distribution, and it found that the appellant’s business was no different from that of a typical trading exchange.

The Court observed that the type of activity that had been described was the same as the activity that had been examined in the authorities cited, namely the decision reported in the 1954 volume of the Supreme Court Reporter at pages 289 and 308, and also the earlier decision recorded in the 1889 volume of the Tax Cases at page 460. Both of those authorities are found in the case reported as Liverpool Corn Trade Association v. Monks. After referring to those reported decisions, the Court stated that, in its view, the judgment rendered by the High Court was correct. Consequently, the Court directed that the appeals be dismissed and that the costs of the proceedings be awarded. In addition, the Court ordered that a single hearing fee be imposed. The final order therefore dismissed the appeals.