2008 (3) TMI 134 - HC - Income Tax

Assessee is a club not having object of earning - even if there be temporary or honorary members who are not entitled to vote, the assessee would not cease to be governed by the principles of mutuality - Once the assessee is governed by the principles of mutuality, its income earned would not be assessable - Tribunal was right in holding that the entrance fees received by assessee & subscription for the life members is capital receipt not chargeable to tax as the principle of mutuality applies

Summary

Issues Involved:
- Taxability of entrance fees received by the Assessee under the principle of mutuality.
- Tax treatment of the commuted value of subscription for life members.
- Validity of the Assessment orders for Assessment Years 1992-93 and 1993-94 under Section 263 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Taxability of Entrance Fees under the Principle of Mutuality:
The primary issue was whether the entrance fees received by the Assessee should be considered a capital receipt not chargeable to tax under the principle of mutuality. The High Court referred to the principle of mutuality as outlined in Halsbury's Laws of England, which states that when persons combine and contribute to a common fund for a mutual purpose, any surplus returned to them is not considered profit. The court held that there must be complete identity between contributors and participators. The court cited the Supreme Court's judgment in Bankipur Club, which emphasized that activities carried out without a profit motive and not tainted with commerciality fall under mutuality and are not taxable. The court concluded that the entrance fees received by the Assessee were indeed capital receipts and not chargeable to tax.

2. Tax Treatment of Commuted Value of Subscription for Life Members:
The second issue was whether the commuted value of subscription for life members should be taxed or treated as capital receipts. The court examined the precedent set by the Bombay High Court in CIT Vs. WIAA Club, which held that part of the entrance fees paid as a compounded payment for annual subscription would be income, while the balance would be a capital receipt. However, the court found this judgment distinguishable in light of the Supreme Court's ruling in Bankipur Club, which upheld the principle of mutuality. The court concluded that the commuted value of subscription for life members should be treated as a capital receipt and not taxed.

3. Validity of Assessment Orders under Section 263:
The final issue was whether the Assessment orders for the years 1992-93 and 1993-94 were erroneous and prejudicial to the interest of the Revenue, warranting invocation of jurisdiction under Section 263 by the Commissioner of Income Tax (CIT). The court noted that the Income Tax Appellate Tribunal (ITAT) had relied on the Supreme Court's judgment in Chelmsford Club, which held that the annual letting value of the club was not assessable to income tax under the head "income from house property." The ITAT found that the Assessee club was not formed for the purpose of earning profit. The court agreed with the ITAT's findings and held that the assessment orders were not erroneous or prejudicial to the interest of the Revenue.

Conclusion:
The High Court upheld the ITAT's decision, confirming that the entrance fees and commuted value of subscription for life members received by the Assessee are capital receipts and not chargeable to tax under the principle of mutuality. The court found no infirmity in the ITAT's judgment and dismissed the Revenue's appeal.