2023 (1) TMI 672 - HC - Income Tax

Principle or the doctrine of mutuality - transactions entered into by the assessee with the non-permanent and non-life members - whether principle of mutuality would apply with reference to transactions entered into by an assessee with non-permanent and non-life members in the context of a club, facilities of which are availed of by all members? - HELD THAT - As it is not the case of the revenue that subscriptions and other receipts from non-permanent members and non-life members haven t gone to the common fund of the assessee-society or the assessee has earned any profit by trading it or the same has gone otherwise than the common fund of the Club. In the absence thereof, we respectfully following the decision of Bankipur Cub Ltd., 1997 (5) TMI 392 - SUPREME COURT and the decision of Secunderabad Club 1975 (12) TMI 6 - ANDHRA PRADESH HIGH COURT and also the recent decision in the case of CIT v. Willingdon Sports Club 2008 (3) TMI 134 - BOMBAY HIGH COURT hold that even if there are non-permanent members, non-life members, temporary or honorary members who are not entitled to vote or offer themselves as candidates for any elective office or to the membership of the council or have no right of disposal over the surplus in case of dissolution of the club, 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 would not be income which would be assessable to tax and accordingly the additions of admission fees, interest received from banks and News letter sponsorship made by the AO and sustained by the ld. CIT(A) for the above asst. years are deleted. The grounds taken by the assessee in all the asst. years are therefore, allowed. Tribunal has held that even if there are non-permanent members, non-life members, temporary or honorary members, they are not entitled to vote or offer themselves as candidates for any elective office, or have no right of disposal over the surplus in case of dissolution of the club, the assessee would not cease to be governed by the principle of mutuality. Once an assessee is governed by the principle of mutuality, its income would not be construed to be an income within the meaning of the Act and liable to be taxed. We are of the view that Tribunal was not justified in taking the view that the principle of mutuality would not apply with reference to transactions entered into by the appellant with the non-permanent and non life members. Decided in favour of the appellant/assessee

Summary

Issues:
1. Application of principle of mutuality to transactions with non-permanent and non-life members.
2. Requirement of non-permanent or non-life members' participation in the management of the association for exemption under the doctrine of mutuality.
3. Justification of Tribunal's dismissal of appeal without discussion on tax liability for interest amounts received from banks and receipts from sale of scrap.

Analysis:
1. The appeal was filed under Section 260A of the Income Tax Act against the order of the Income Tax Appellate Tribunal regarding the application of the principle of mutuality to transactions with non-permanent and non-life members. The substantial questions of law admitted by the court focused on the justification of the ITAT's decision in this regard.

2. The appellant, a recreational club registered as a society, contested the assessing officer's decision to include amounts received from non-permanent and non-life members in its income for tax assessment purposes. The first appellate authority and the Tribunal upheld this decision, stating that the principle of mutuality did not apply to transactions with such members due to their limited rights and participation in the club's affairs.

3. The appellant argued inconsistency in the Tribunal's views across different assessment years and cited legal precedents to support its case. The court examined the doctrine of mutuality, emphasizing that a person cannot profit from oneself, and highlighted the commonality of contributors and participants in mutual organizations. The court referred to relevant Supreme Court and High Court decisions on the principle of mutuality.

4. The court noted that in previous and subsequent assessment years, the Tribunal had ruled in favor of the appellant based on the principle of mutuality, even in the presence of non-permanent and non-life members with limited rights. The court agreed that the principle of mutuality applied to the appellant's transactions with all members, regardless of their membership type or participation in the club's management.

5. Ultimately, the court held that the Tribunal was unjustified in its decision to exclude non-permanent and non-life members from the application of the principle of mutuality. The court ruled in favor of the appellant on the substantial questions of law raised in the appeal, leading to the allowance of the appeal without costs. The judgment clarified the application of the principle of mutuality in the context of the appellant's transactions with different categories of members.