The Supreme court of India held that excess of income over expenditure in the hands of a company is taxable.
Facts of the case:
The assessee, Yum! Restaurants (Marketing) Private Limited was incorporated by Yum! Restaurants (Marketing) Private Limited (YRIPL) as its fully owned subsidiary after having obtained approval from the Secretariat for Industrial Assistance (SIA) for the purpose of economization 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 the assessee, whereby it was obligated to operate on a non-profit basis on the principles of mutuality.
Interpretation of the law:
For the Assessment Year under consideration, the assessee filed its returns stating the income to be “Nil” under the pretext of the mutual character of the company. Assessing Officer did not accept the same. The imposition of liability by the Assessing Officer was upheld by the Commissioner of Income Tax (Appeals) on the ground of taint of commerciality in the activities undertaken by the assessee company, which was further confirmed by the Tribunal, wherein the essential ingredients of the doctrine of mutuality were found to be missing.
The consistent line of opinion recorded by the aforementioned three forums was further approved in appeal by the High Court. The assessee has contended that the sole objective of the assessee company was to carry on the earmarked activities on a non-profit basis and to operate strictly for the benefit of the contributors to the mutual concern.
The question of law which the Apex Court clarified was whether the assessee company would qualify as a mutual concern in the eyes of the law, thereby exempting subject transactions from tax liability and Whether the excess of income over expenditure in the hands of the assessee company is not taxable.
The division bench consisting of Justice A.M. Khanwilkar and Justice Dinesh Maheshwari upheld the impugned order passed by the High court and stated, “the questions posed for our consideration stand answered against the appellant (assessee company) and in favour of the Revenue, and the appeal stands disposed of upholding the impugned judgment with the liberty to the appellant to pursue the remedy of rectification, as per law. There shall be no order as to costs. Pending interlocutory applications, if any, shall also stand disposed of.”