The income of a mutual association is not liable to tax, but where the surplus is derived from some of the members and not all, it is not exempt from tax.

1. The assessee is a private company limited by guarantee and it was incorporated on the 31st August 1944. Before the incorporation the Association had passed a certain resolution and that resolution was that after rationing week S6 and since 57th week, Mobadla at the rate of 8 annas per bag is to be collected from every rationing shop and for the shops which have registered less than 1,000 units on rationing cards Mobadla at the rate of 4 annas per bag is to be charged. Out of the proceeds of the Mobadla thus collected as above 25 p.c. will be utilised towards office expenses and charity and the balance of 75 p.c. will be distributed amongst members as Mobadla. Therefore, briefly, the scheme was this. It was not possible for all members of the Association to get a ration card. The Association used its good office to get ration cards for some of its members. As these members benefited by obtaining ration cards and other members were with out ration cards, those who obtained ration cards were made to compensate those who had not, and the scale of compensation was laid down. The contention of the Income-tax authorities was that the surplus of 25 p.c. after legitimate deductions was the income of the asses-see which was liable to tax. The assessee contested this position and has now asked the Tribunal to refer the question to us whether this surplus constitutes income.

2. Mr. Pandits contention is that this is a mutual association and income arising to a mutual association is not subject to tax. What we nave to consider is whetner it is a mutual association according to the test laid down by various authorities. The reason why the income of a mutual association is not liable to tax is that a person cannot make piofit out of himself and therefore the test of mutuality is only satisfied when the income is derived from the contribution of all the members and the income or part of it is spent for the benefit of all the members; in other words, there must be an identity between the contributors of the fund and the participators in that fund. Unless and until such an identity is established the case would not fall within the principle oi mutuality. If the Association is not mutual then the income of the Association is derived from some of the members. There is nothing in law to prevent an association doing business with some of its members, in which case the income of that business would be liable to tax because the identity is not esablished between the association as a whole and the members who do business with it. This principle is iairly clear and the only question is the application of the principle to the facts of each case.

3. This principle was clearly enunciated by the Supreme Court in Commr. of Income-tax v. Royal Western India Turf Club Ltd., (1953) 24 ITR 551: (AIR 1954 SC 85) (A), to which Mr. Pandit has referred. In that case they referred with approval to the well known case of Styles v. New York Life Insurance Co., (1889) 2 Tax Cas 460 (B), and at p. 559 (of ITR): (at p. 89 of AIR), they refer to the observations of Lord Macmillan in that case:

"The cardinal requirement is that all con-tributsrs to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial."

And at p. 560 (of ITR): (at p. 89 of AIR), they point out what the true principle is:

"The principle that no one can make a profit out of himself is true enough, but may in its application easily lead to confusion. There is nothing per se to prevent a company from making a profit out of its own members."

The Supreme Court has examined various decisions and the view it has taken is the view which is in conformity with the majority judgment in the Styles case (B).

4. Mr. Pandit has also