1984 (3) TMI 216 - AT - Income Tax

Summary

Issues Involved:
1. Additional ground of appeal by the department.
2. Applicability of the principle of mutuality for exemption of income.
3. Nature of surplus and its distribution among members.
4. Trading or profit motive in transactions between the club and its members.
5. Relevance of other judicial authorities and precedents.

Detailed Analysis:

1. Additional Ground of Appeal by the Department:
The department raised an additional ground of appeal contending that the Commissioner (Appeals) erred in holding that the income of the assessee is not chargeable on the grounds of mutuality due to the lack of complete identity between contributors and recipients of the fund. However, this was found to be a repetition of the existing grounds in the memo of appeal and was thus rejected as infructuous.

2. Applicability of the Principle of Mutuality for Exemption of Income:
The core dispute revolved around whether the assessee was entitled to claim exemption based on the principle of mutuality. The assessee declared income from interest earned on bank deposits and was assessed under 'Income from house property' for renting out cottage suites to members and their guests. The Commissioner (Appeals) had held that the income from renting out properties was exempt based on mutuality, following the ruling in Presidency Club Ltd. v. CIT. The department appealed against this, while the assessee filed cross-objections.

3. Nature of Surplus and its Distribution Among Members:
The principle of mutuality, as enunciated in CIT v. Madras Race Club, hinges on the idea that no person can make a profit out of himself. The Commissioner had argued that the club's articles of association contained clauses that disrupted the identity of contributors and participators in the surplus, specifically clauses 6 and 5, which restricted certain classes of members from claiming assets upon dissolution. However, the Tribunal found that the surplus referred to in the principle of mutuality pertains to the excess of receipts over expenditure in annual accounts, not hypothetical surplus upon dissolution. The surplus was used for the benefit of all members, and no specific class of members was deprived of this surplus.

4. Trading or Profit Motive in Transactions Between the Club and Its Members:
The Tribunal examined whether the club engaged in any trading or profit-making activities. It concluded that the club did not indulge in any commercial activity or trade but was merely organizing social activities for its members. The income from property was not liable to assessment as it did not arise from any profit motive. The ruling in Presidency Club Ltd. was applied, and the department's reliance on CIT v. Wheeler Club Ltd. was found inapplicable.

5. Relevance of Other Judicial Authorities and Precedents:
The department cited various cases, including CIT v. Mathuralal Kapoorchand & Co., Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT, CIT v. Union Land & Building Society (P.) Ltd., and CIT v. Zorostrian Building Society Ltd. However, these cases were found irrelevant or inapplicable to the present matter. The Tribunal upheld the Commissioner (Appeals)'s order for 1977-78 and 1978-79 and set aside the Commissioner's order under section 263 for 1979-80 and 1980-81, allowing the assessee's appeals.

Conclusion:
The Tribunal dismissed the department's appeals for 1977-78 and 1978-79 and allowed the assessee's appeals for 1979-80 and 1980-81, affirming the principle of mutuality and the non-assessability of income from property under the head 'Income from house property'.