In a recent case of Yum! Restaurants (Marketing) Private Limited Versus Commissioner of Income Tax, Delhi, Supreme Court Bench comprising of Justice A.M kanwilkar and Justice Dinesh Maheshwari, stated that the doctrine of mutuality bestows a special status to qualify for exemption from tax liability and it is a settle proposition of law that exemption are to put to strict interpretation.
FACTS OF THE CASE
The Appellant Company Yum! Restaurants (Marketing) Private Limited or assessee company was incorporated by YRIPL as its fully owned subsidiary after having obtained approval from the Secretariat for Industrial Assistance for the purpose of economization of the cost advertising and promotion to the franchised as per their needs. The approval was granted subject to certain conditions as regards the functioning of assesse, whereby it was obligated to operate on a non-profit basis on the principle of Mutuality.In furtherance of the approval, the assessee entered into a Tripartite Operating 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.
ASSESSING OFFICER
For the Assessment Year under consideration, the assess filled its returning stating the income to be “NIL” under the pretext of the mutual character of the company and the same was not accepted by the Assessing Officer.
COMMISSIONER OF INCOME TAX
The imposition of liability by the Assessing Officer was upheld on the ground of taint of Commerciality in the activities undertaken by the assessee company and stated that the excess receipts over the expenditure i.e the surplus would be income liable to tax
INCOME TAX APPELLATE TRIBUNAL
After Income Tax Commission, the liability was further confirmed , wherein the essential ingredients of the doctrine of Mutuality were found to be missing, whereas the main plank of the assesssee’s argument is that the principles of mutuality will apply and hence the income cannot be taxed.
OBSERVATIONS BY TRIBUNAL
- It was stated that, it is seen that apart from contributions is also received from M/s Foods Ltd. And YRIPL. Pepsi food Ltd. Is neither a franchisee nor a beneficiary. Similarly some contribution is also received from YRIPL contribution is also received from YRIPL which YRIPL is not under any obligation to pay.
- Thus it can be said that essential requirement that of the contributors to the common fund are either to participate in the surplus or they are beneficiaries to the contribution are missing.
- the common AMP activities no benefit accrues to Pepsi Food Ltd. or YRIPL. Accordingly the principles of mutuality cannot be applied.
- It is a different fact that the assessee was established with the object not to make profits but it’s also a fact there is a surplus in the hands of the assesse which arose due to contribution from certain persons who were neither the beneficiaries nor have right to receive the surplus.
HIGH COURT OF DELHI'S DECISION:
The consistent line of opinion recorded by the aforementioned three forums was further approved in appeal by the HC as by observing:
“the principle of mutuality is applicable to those entities whose activities are not tinged with commercial purpose, as a matter of fact in the instant case the parent company, i.e., YRIPL which has also contributed to the brand fund is under the agreement under no obligation to do so. The contributions of YRIPL are at its own discretion.”
Principle of Mutuality would not be applicable in the present case
SUPREME COURT's DECISION:
Supreme Court stated that the doctrine of mutuality bestows a special status to qualify for exemption from tax liability.
Apex Court Bench further added that,"It is a settled proposition of law that exemption are to be put to strict interpretation. The appellant having failed to fulfil the stipulations and to prove the existence of mutuality, the question of extending exemption from tax liability to the appellant, that too at the cost of public exchequer, does not arise".
"Once it is conclusively determined that the assessee company had not operated as a mutual concern, there would be no question of extending exemption from tax liability". Bench added.
SC Bench stated that The rectification application raising that ground is still undecided and stated to be pending before the Tribunal, and stated to be pending before the Tribunal.
The Supreme Court further disposed of the appeal by upholding the impugned judgment with liberty to the appellant to pursue rectification as per law.
Read Judgment @LatestLaws.com:
Tags :
