INCOME TAX ACT, 1961

Section 4

Income - Mutual concern - Applicability of principle of mutuality - Commerciality in activities undertaken by assessee

The appellant company Yum! Restaurants (Marketing) Private Limited ('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 ('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. In furtherance of the approval, the assessee entered into a Tripartite Operating Agreement ('Tripartite Agreement') with YRIPL and its franchisees, wherein the assessee company received fixed contributions to the extent of 5 per cent of gross sales for the proper conduct of the advertising, marketing and promotional activities for the mutual benefit of the parent company and the franchisees. Assessee filed its returns stating the income to be 'Nil' under the pretext of the mutual character of the company. The same was not accepted by the assessing officer. Held: 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 pre-condition for the grant of permission to operate as a mutual concern. However, drifting from this mandate, the Tripartite Agreement made it discretionary upon YRIPL to contribute to the common pool, thereby putting it at a higher pedestal than the franchisees. It was acting under a Trust for the contributors, and was under an overriding obligation to spend the amounts received for advertising, marketing and promotional activities. It is urged that once the incoming amount is earmarked for an obligation, it does not become 'income' in the hands of the assessee as no occasion for the application of such income arises.

Affirmed:final judgment and Order, dated 1-4-2009 passed by the High Court ITA No. 1433 of 200. Relied:Bangalore Club v. CIT & Anr. (2013) 5 SCC 509 : 2013 TaxPub(DT) 434 (SC), New York Life Insurance Co. v. Styles (Surveyor of Taxes) (1889) 2 TC 460, English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. of Agricultural IT, Assam AIR 1948 PC 142 : 1948 TaxPub(DT) 0045 (Privy Council), CIT, Bombay City v. Royal Western India Turf Club Ltd. AIR 1954 SC 85 : 1953 TaxPub(DT) 127 (SC), British Tax Encyclopaedia British Tax Encyclopedia (I), 1962 Edition, Pgs. 1200 and 1201, Dalmia Cement Ltd. v. CIT (1999) 4 SCC 124 : 1999 TaxPub(DT) 1276 (SC), CIT v. Sitaldas Tirathdas AIR 1961 SC 728 : 1961 TaxPub(DT) 145 (SC), Associated Power Co. Ltd. v. CIT (1996) 7 SCC 221 : 1996 TaxPub(DT) 674 (SC) and CIT v. Travancore Sugars & Chemical Ltd. (1973) 3 SCC 274 : 1973 TaxPub(DT) 377 (SC).

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