# Commissioner of Income-tax, Bombay City v. Royal Western

- **Citation:** [1961] 2 S.C.R. 798
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Bench:** J. L. Kapur, M. Hidayatullah, J.C. Shah
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/commissioner-of-income-tax-bombay-city-v-royal-western-2045
- **Pages:** 8

## Headnote

Income-tax-Assessment-Company running a Stock Exchange
and dealing in shares-Admissionfees of Members and Authorised
Assistants-If taxable income.
The object with which the appellant company was formed
was to promote ~nd regulate the business in shares, stocks and
securities etc., and to establish and conduct a Stock Exchange
in order to facilitate the transaction of such business. Its capital was divided into shares on which dividend could be earned.
It provided a building wherein business was to be transacted
under its supervision and control. It made rules for the conduct of business of sale and purchase of shares in the Exchange
premises. During the assessment year in question the company's receipts consisted of certain amounts received as admission fee from Members and Authorised Assistants and the question stated to the High Court for its opinion was whether these
fees in the hands of the appellant were taxable income. The
High Court answered the question in the affirmative. It held
that the appellant was not a mutual society, that dividends
could be earned on its share capital, that any person could become a share-holder but every share-holder was not a member
unless he paid the admission fee and the real object of the company was to carry on business of exchange of stocks and earn
profits. The case of the appellant, inter alia, was that as the
amount received as membership fee was shown as capital in the
books of the company and there was no periodicity, it should be
treated as capital receipt exempt from assessment.
-
2 S.C.R. SUPREME COURT REPORTS
799
Held, that the High Court was right in its decision and the
appeals must be dismissed.
It was wholly immaterial how the appellant treated the
amounts in question. It is the nature of the receipt and not
how the assessee treated it that must determine its taxability.
Since the fee received on account of Authorised Assisstants
fall within the decision of this Court in Commissioner of Incometax v. Calcutta Stock Exchange Association Ltd., (1959) 36 I.T.R.
222, it must be held to be taxable income.
,
The question as to whether the Members' admission fee
was taxable income was to be determined by the nature of the
business of the company, its profits and the distribution thereof
as disclosed by· its Memorandum and Articles of Association and
the rules made for the conduct of business. They showed that
the income of the company was distributable amongst its shareholders as in any other joint stock company, and the body of
trading members who paid the entrance fees and share-holders
were not identical. The element of mutuality was, therefore,
lacking.
Liverpool Corn Trade Associatian v. Monks, (1926) 2 K. B.
uo,. applied.
Commissioner of Income-tax, Bombay City v. Royal Western
India Turf Club Ltd., [19541 S.C.R. 289 and Styles v. New York
Life Insurance Co., (1889) 2 T.C. 460, referred to.
ClvIL APPELLATE JURISDICTION: Civil Appeals Nos.
187 and 190 of 1960.
Appeals from the judgment dated 22nd January,
1957, of the Punjab High Court (Circuit Bench),
Delhi, in Civil Reference No. 6 of 1953.
Veda Vyasa, S. K. Kapur and K. K. Jain, for the
appellant.
R. Ganapathi Iyer and• D. Gupta, for the respondent.
1960. November 30. The Judgment of the Court
was delivered by
KAPUR, J.-These appeals are brought by the assessee company against a common judgment and order
of the Punjab High Court by which four appeals were
decided in Civil Reference No. 6of1953. The appeals
relate to four assessment years, 1947-48, 1948-49,
1949-50 and 1950-51. Two of these assessments, i.e.,
for the years 1947-48 and 1948-49 were made on the
z960
Delhi Stock
E:rchang1
Association Ltd.
v.
Commissioner
of r .. com•-ta:r,
Dellli
Kapur ].
I960
Delhi Stach
Exchange
Association Ltd.
v.
Commissioner
(If Income-tax,
Delhi
Kapur }.
800
SUPREME COURT REPORTS
[1961]
appell~nt as successor to the two limited companies
hereinafter mentioned.
Briefly stated the facts of the case are that the
appellant company was incorpo

## Text

798
SUPREME COURT REPORTS
(1961]
In our opinion the High Court was in error and the
question referred should have been decided in favour
Ch . Mahar~jsa
of the appellant.
We therefore allow the appeal, set
inta111a•U
aran
.
.
.
Nath Sah Deo aside the judgment and order of the High Court and
v.
answer the question in favour of the appellant who
The Commissio"'' will have his costs in this Courc and the High Court.
of lncome-taK.
Bihar 6- Orissa
T<apur ].
.. Vovetnber 30.
Appeal allowed.
DELHI STOCK EXCHANGE ASSOCIATJON LTD.
v .
COMMISSIONER OF INCOME TAX, DELHI
(J. L. KAPUR, M. HIDAYATULLAH and J.C. SHAH, JJ.)
Income-tax-Assessment-Company running a Stock Exchange
and dealing in shares-Admissionfees of Members and Authorised
Assistants-If taxable income.
The object with which the appellant company was formed
was to promote ~nd regulate the business in shares, stocks and
securities etc., and to establish and conduct a Stock Exchange
in order to facilitate the transaction of such business. Its capital was divided into shares on which dividend could be earned.
It provided a building wherein business was to be transacted
under its supervision and control. It made rules for the conduct of business of sale and purchase of shares in the Exchange
premises. During the assessment year in question the company's receipts consisted of certain amounts received as admission fee from Members and Authorised Assistants and the question stated to the High Court for its opinion was whether these
fees in the hands of the appellant were taxable income. The
High Court answered the question in the affirmative. It held
that the appellant was not a mutual society, that dividends
could be earned on its share capital, that any person could become a share-holder but every share-holder was not a member
unless he paid the admission fee and the real object of the company was to carry on business of exchange of stocks and earn
profits. The case of the appellant, inter alia, was that as the
amount received as membership fee was shown as capital in the
books of the company and there was no periodicity, it should be
treated as capital receipt exempt from assessment.
-
2 S.C.R. SUPREME COURT REPORTS
799
Held, that the High Court was right in its decision and the
appeals must be dismissed.
It was wholly immaterial how the appellant treated the
amounts in question. It is the nature of the receipt and not
how the assessee treated it that must determine its taxability.
Since the fee received on account of Authorised Assisstants
fall within the decision of this Court in Commissioner of Incometax v. Calcutta Stock Exchange Association Ltd., (1959) 36 I.T.R.
222, it must be held to be taxable income.
,
The question as to whether the Members' admission fee
was taxable income was to be determined by the nature of the
business of the company, its profits and the distribution thereof
as disclosed by· its Memorandum and Articles of Association and
the rules made for the conduct of business. They showed that
the income of the company was distributable amongst its shareholders as in any other joint stock company, and the body of
trading members who paid the entrance fees and share-holders
were not identical. The element of mutuality was, therefore,
lacking.
Liverpool Corn Trade Associatian v. Monks, (1926) 2 K. B.
uo,. applied.
Commissioner of Income-tax, Bombay City v. Royal Western
India Turf Club Ltd., [19541 S.C.R. 289 and Styles v. New York
Life Insurance Co., (1889) 2 T.C. 460, referred to.
ClvIL APPELLATE JURISDICTION: Civil Appeals Nos.
187 and 190 of 1960.
Appeals from the judgment dated 22nd January,
1957, of the Punjab High Court (Circuit Bench),
Delhi, in Civil Reference No. 6 of 1953.
Veda Vyasa, S. K. Kapur and K. K. Jain, for the
appellant.
R. Ganapathi Iyer and• D. Gupta, for the respondent.
1960. November 30. The Judgment of the Court
was delivered by
KAPUR, J.-These appeals are brought by the assessee company against a common judgment and order
of the Punjab High Court by which four appeals were
decided in Civil Reference No. 6of1953. The appeals
relate to four assessment years, 1947-48, 1948-49,
1949-50 and 1950-51. Two of these assessments, i.e.,
for the years 1947-48 and 1948-49 were made on the
z960
Delhi Stock
E:rchang1
Association Ltd.
v.
Commissioner
of r .. com•-ta:r,
Dellli
Kapur ].
I960
Delhi Stach
Exchange
Association Ltd.
v.
Commissioner
(If Income-tax,
Delhi
Kapur }.
800
SUPREME COURT REPORTS
[1961]
appell~nt as successor to the two limited companies
hereinafter mentioned.
Briefly stated the facts of the case are that the
appellant company was incorporated in the year 1947.
Its objects inter alia were to acquire as a going concern
activities, functions and business of the Delhi Stock &
Share Exchange Limited and the Delhi Stock and
Share Brokers Association Limited and to promote
and regulate the business of exchange of stocks and
shares, debentures and debenture stocks, Government
securities, bonds and equities of any description and
with a view thereto, to establish and conduct Stock
Exchange in Delhi and/or elsewhere. Its capital is
Rs. 5,00,000 divided into 250 shares of Rs. 2,000 each
on which dividend could be earned. The appellant
company provided a building and a hall wherein the
business was to be transacted under the supervision
and control of the appellant. The appellant company
also made rules for the conduct of business of sale and
purchase of shares in the Exchange premises. The
total income for the year 1947-48 was Rs. 29,363 out
of which a sum of Rs. 15,975 shown as admission fees
was deducted and the income returned was Rs. 13,388.
In the profit and loss account of that year Members'
admission fees wer9 shown as Rs. 9,000 and on
account of Authorised Assistants admission fees Rs.
6,875.
The Income-tax Officer who made the assessment for the year 1947-48 disallowed this deduction.
The return for the following year also was made on a
similar basis but the return.for the years 1949-50 and
1950-51 did not take into account the admission fees
received but in the Director's report the amounts so
received were shown as having been taken directly
into the balance sheet. The Income-tax Officer, however, disallowed and added back the amount so received to the income returned by the appellant. ·
Against these orders appeals were taken to the
Appellate Assistant Commissioner who set aside the
additional assessments made under s. 34 in regard to
the assessment years 1947-48, 1948-49and1949-50 and
the 4th appeal in regard to the year 1950-51 was
decided against the appellant. Both sides appealed
2 S.C.R. SUPREME COURT REPORTS
801
to the Income-tax Appellate Tribunal against the
z96o
respective orders of the Appellate Assistant Commis-
.
d th T 'b
1 d . d d ll th
1 .
Delhi Stock
s1oner an
e
r1 una
em e
a
e appea s In
Exchange
favour of the appellant. It was held by one of the Association Ltd.
members of the Tribunal that the amounts received
v.
as entrance fees were intended to be and were in fact
Commissioner
treated as capital receipts and were therefore exclud0! Income·tax,
ed from assessment and by the other that as there was
Delhi
no requisite periodicity, those amounts were not
Kapur J.
taxable. At the instance of the respondent a case was
stated to the High Court on the following question:-
"Whether the admission fees of Members or
Authorised Assistants received by the assessee is taxable income in its hands?"
The High Court answered the question in favour of
the respondent. The High Court held that the appellant was not a mutual society and therefore was not
exempt from the payment of income-tax; that it had
a share capital on which dividend could be earned and
any person could become a shareholder of the company by purchasing a share but every shareholder
could not become a member unless he was enrolled,
admitted or elected as a member and paid a sum of
Rs. 250 as admission fee. On becoming a member he
was entitled to exercise all rights and privileges of
membership. It also found that the real object of the
company was to carry on business as a Stock Exchange
and the earning of profits. It was held therefore that
the admission fees fell within.the ambit of the expres-
.sion "profits and gains of business, profession or
vocation". The further alternative argument which
was raised, i.e., that the income fell under s. 10(6) of
the Act, was therefore not decided.
Mr. Veda Vyasa contended on behalf of the appellant that there were only 250 members of the appellant company; that the amount received as membership fees was shown as capital in the books of the
company and there was no periodicity and therefore
the amounts which had been treated as inco)lle should
have been treated as capital receipts and therefore
exempt from assessment. It was firstly contended
that the question did not arise out of the order of the
i960
Delhi Stock
Exchange
Association Ltd
v.
Commissioner
of Income-lax,
Del/Ji
Kapur ].
802
SUPREME COURT REPORTS
[1961]
Tribunal and that a new question had been raised but
the objection is futile not only because of the absence
of any such objection at the stage of the drawing up
the statement of the case but also because of failure
to object in the High Court; nor do we see any validity
in the objection raised. That was the only matter in
controversy requiring the decision of the court and
was properly referred by the Tribunal. It was then
contended that the question had to be answered in the
light of facts admitted or found by the Tribunal and
that the nature of the appellant's business or the rules
in regard to membership could not be taken into consideration in answering the question. That again is
an unsustainable argument. The statement of the
case itself shows that all these matters were taken
into consideration by one of the members of the
Tribunal and the learned judges of the High Court
also decided the matter on that material which had
been placed before the Income tax authorities and
which was expressly referred to in their orders and
which again was placed before the High Court in the
argument presented there on behalf of the appellant
company.
It is whollv immaterial in the circumstances of the
present case to take into consideration as to how the
appellant treated the amounts in question. It is not
how an assessee treats any monies received but what
is the nature of the receipts which is decisive of its
being taxable. These amounts were received by the
appellant as membership admission fees and as admission fees paid by the· members on account of Authorised Assistants. As far as the latter payment is concerned that would fall within the decision of this
Court in Commissioner of Income-tax v. Gafoutta Stock
Exchange Association Ltd. (') and therefore is taxable
incoine. The former, i.e., members admission fees has
to be decided in accordance with the nature of the
business of the appellant company, its Memorandum
and Articles of Association and t,he Rules made for
the conduct of business. Tho appellant company was
an association which carried on a trade and its profits
were divisible as dividend amongst the shareholders.
(1) (1959) 36 l.T.R. 222.
2 S.C.R. SUPREME COURT REPORTS
803
The object with which the company was formed
z96o
was to promote and regulate the business in shares,
D lh. 51
,.
stocks and securities etc., and to establish and conduct
;""~•an;:
the business of a Stock Exchange in Delhi and to faciAssociation Ltd.
litate the transaction of such business. The business
v.
was more like that in Liverpool Corn Trade AssociaCommissioner
tion v. Monks (1).
In that case an association was
of Income-ta,.,
Delhi
formed with the object of promoting the interest of
corn trade with a share capital upon which the associaKapur J.
tion was empowered to declare a dividend.
The
Association provided a Corn Exchange market, newsroom and facilities for carrying on business and membership was confined to persons engaged in the corn
trade and every member was required to be a shareholder and had to pay an entrance fee.
The Association
also charged the members and every person making
use of facilities a subscription which varied according
to the use made by them. The bulk of the receipts of
the Association was derived from entrance fees and
subscriptions. It was therefore contended that the
Association did not carry on a trade and that it was
a mutual association and entrance fees and subscriptions should be disregarded in computing assessment
of the assessable profits. It was held that it was not
a mutual association whose transactions were incapable of producing a profit; that it carried on a trade
and the entrance fee paid by members ought to be
included in the association's receipts for purposes of
computing the profit.
Rowlatt, J. said at p. 121:
"I do not see why that amount is not a profit. The
company has a capital upon which dividends may be
earned, and the company has assets which can be used
for the purpose of obtaining payments from its members for the advantages of such use, and one is tempted to ask why a profit is not so made exactly on the
same footing as a profit is made by a railway company
who issues a travelling ticket at a price to one of its
own shareholders, or at any rate as much a profit as a
profit made by a company from a dealing with its own
shareholders in a line of business which is restricted
to the shareholders."
(I) (1926) 2 K.B. IIO.
Delhi Stock
Exchange
Association Ltd.
v.
Conimissioner
of Income-ta¥,
Delhi
'
Kapur j.
804
SUPREME COURT REPORTS
[1961]
In Commissioner of Income-tax, Bombay City v. Royal
Western India Turf Club Ltd.(') this Court rejected
the applicability of the principle of mutuality because
there ·was no mutual dealing between members inter
se.
There was no putting up a common fund for discharging a common obligation undertaken by the contributors for their mutual benefit and for this reason
the case decided by the House of Lords in Styles v.
New York Life Insurance Company(') was held not
applicable.
-
In the present case the Memorandum of Association
shows that the object with which the company was
formed was to promote and regulate the business of
exchange of stocks, shares, debentures, debenture
stocks etc. The income, if any, which accrued from
the business of the appellant company was distributable amongst the shareholders like in every joint stock
company.
According to the Articles of Association
the members included shareholders and members of
the Exchange and according to the rules and bye-laws
of the appellant company 'member' means an individual, body of individuals, firms, companies, corporations or any corporate body as may be on the list
of working members of the Stock Exchange for
the time being. In the Articles of Association els. 7
& 8, provision was made for the election of members by the Board of Directors and Rules 9 & 10
laid down the procedure for the election of these
members. The entrance fees were payable by the
trading members elected under the Rules and Bye.
Laws of the Association, who alone with their Associates, could transact business in stocks and shares in
the Association. Therefore, the body of trading members who paid the entrance fees, and the shareholders
among whom the profits were distributed were not
identical and thus the element of mutuality was lacking. It is the nature of the business of the company
and the profits and the distribution thereof which are
the determining factors and in this case it has not
been shown that the appellant's business was in any
way difierent from that which was carried on in the
(I) [1954] S.C.R. 289, 308.
(2) (1889) 2 T.C. 46o.
2 s.c.R. SUPREME COURT REPORTS
805
case reported as Liverpool Gorn Trade .Association v.
Monks (1).
In our opinion the judgment of the High Court is
right and the appeals are therefore dismissed with
costs. One hearing fee.
Appeals dismissed.
M/S. S. C. CAMBATTA & CO. PRIVATE LTD.,
BOMBAY
v.
THE COMMISSIONER OF EXCESS PROI!'ITS
TAX, BOMBAY
(J. L. KAPUR, M. HIDAYATULLAH and J. c. SHAH, JJ.)
Excess Profits Tax-Assessment-Sale of theatre and restaurant
-Goodwill-Value of-Principle of computation-Excess Profits
Tax Act, z940 (XV of I940).
The appellant carried on various businesses and one such
was the running of a Theatre and Restaurant. In October, 1943,
a subsidiary company was formed which was using the premises
of the Theatre under a lease granted to it from April, 1944· In
working out the capital of the two companies for excess profits
tax, a claim of rupees five lakhs for goodwill as part of the capital of the subsidiary company was not taken into account.
On reference to the High _Court it held that the Tribunal
should have allowed the value of the goodwill whatever it
thought was reasonable at the date of transfer. Thereafter the
Tribunal took into account only the value of the lease-hold of
the site to the subsidiary company, and came to the conclusion
that no goodwill had been acquired by the business of the
Theatre as such and whatever goodwill there was related to the
site of building itself, and estimated the value of goodwill at
rupees two lakhs. Petition under ss. 66(1) and 66(2) read with
s. 21 of the Excess Profits Tax Act being rejected by the Tribunal and the High Court, the appellants came in appeal by special leave.
Held, that the goodwill of a business needed to be considered in a broader way. It depended upon a variety of circumstances or a combination of them. The nature, the location, the
(1) (1959) 36 I. T.R. 222,
102
Delhi Sto&k
E:t&hange
Association Ltd.
v.
Commissioner
of Income-la:<,
Delhi
Kapur ].
November 30.