2015 (5) TMI 1 - HC - Income Tax

Principle of Mutuality - taxability of 'Card guest income' and 'general guest fee' received by the club paid by the members - Held that - There is not a finding of fact that the club receives any amount from non-members, all that the Tribunal has held is that the officer has brought the income from the costs, which is to be paid by the members on behalf of the guests. This itself goes contrary to the facts and the decision of the Apex Court in BANGALORE CLUB VS. COMMISSIONER OF INCOME TAX & ANR.,(2013 (1) TMI 343 - SUPREME COURT), on which reliance has been placed by Mr. Desai wherein observed that the first condition to invoke the principle of mutuality requires that there must be a complete identity between the contributors and the participators. However, in the very judgment, the Apex Court spelt out that caution to be exercised while looking to the mutuality or the commercial activity and it is a difficult question of fact. In this case, facts, which is to be seen from factual matrix, shows that neither the ITAT nor CIT come to the conclusion as to who contributed to the funds as non-members. Just because the nonmembers are brought to the club, it would not come out of the mutuality aspect. The decision of this Court in SPORTS CLUB OF GUJARAT LTD. Vs. CIT ,(1987 (10) TMI 21 - GUJARAT High Court ), which is sought to be relied upon by the authorities below and Mr. Desai, this Court held that the assessee s income from interest was not from a mutual activity and as such it was exigible to tax, and therefore, the assessee was not entitled to the benefit under Section 44A and that the entire expenditure incurred in all activities was not deductible from the assessee s taxable income. In the said case, this Court further held that the contributors to the common fund are entitled to participate in the surplus, thereby creating an identity between the participants and the contributors. Just because the transactions, which are non-mutual in character, would not destroy the principle of mutuality. Thus, the decision in the case of BANGALORE CLUB (Supra) would not apply to the facts of the case on hand, since, in that case the assessee-Club had received income from interest on surplus funds kept in member banks. Hence, these appeals deserve to be allowed. - Decided in favour of assessee.

Summary

Issues:
Interpretation of the principle of mutuality in taxation law regarding income from club activities.

Analysis:
The High Court heard multiple appeals challenging an order by the ITAT regarding the taxation of 'card guest income' and 'general guest fee' paid by members of a club. The appellant argued that the Tribunal erred in not applying the 'Principle of Mutuality' correctly, emphasizing that the charges paid by members were for the benefit of the club and not for profit-making. The appellant cited the decision in "CHELMSFORD CLUB VS. COMMISSIONER OF INCOME TAX" to support their case. On the other hand, the respondent contended that income derived from guests, not members, should be taxable.

The ITAT observed that the principle of mutuality applies to amounts received from members, but income from non-members can be subject to taxation. Citing the decision in "CIT Vs. Royal Western Indian Turf Club Ltd.," it was noted that transactions with non-members can be taxable, while transactions with members can be exempt. The Court clarified that the presence of non-member transactions does not negate the principle of mutuality. The judgment highlighted the need for a clear distinction between mutual and non-mutual activities for tax purposes.

The Court referenced the decision in "BANGALORE CLUB VS. COMMISSIONER OF INCOME TAX & ANR." to emphasize the importance of a complete identity between contributors and participants for invoking the principle of mutuality. It was noted that the mere presence of non-members in the club does not undermine the mutual aspect. Referring to "SPORTS CLUB OF GUJARAT LTD. Vs. CIT," the Court reiterated that income from non-mutual activities is taxable, and participants in the common fund must have a right to surplus for mutuality to apply. The judgment concluded that the appellant-club's income was not from a mutual activity, making it taxable.

In the final decision, the High Court allowed all appeals in favor of the appellant-club, emphasizing that the income derived from non-mutual activities should be subject to tax. The Court's ruling clarified the application of the principle of mutuality in distinguishing taxable income from club activities involving members and non-members.