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TMI Blog1984 (3) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... no complete identity between contributors to the fund and recipients of the fund. " We find that in the very first ground of appeal raised for the two years, the department raises the contention that the Commissioner (Appeals) erred in holding that the principle of mutuality was applicable in the assessee's case. The additional ground sought to be raised on behalf of the department in merely a repetition of the contention raised in the memo of appeal and it is not, therefore, any additional ground. For these reasons, therefore, the additional ground is rejected as infructuous. 3. The dispute between the department and the assessee centres around the question whether the assessee is entitled to its claim for exemption on the principle of mutuality. For all the four years under consideration, the assessee declared in its returns income from only one source and that is, the interest earned on its deposits with banks. The ITO held that the assessee was also liable to be assessed under the head 'Income from house property' on the bona fide annual value of its properties consisting of cottage suites rented out to members and their guests. Against these assessments for the years 1977- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent savings and not income. The Income-tax Act seeks to tax income and not savings... " Then further : " The second aspect relates to cases of absence of a trade or business which produced profits. For instance, a members' club is intended to promote social intercourse among the members. It does not purchase or sell commodities. It is merely a convenient instrument for the purpose of providing facilities for the members. There is no element of profit or concept of trade in such a club. Unless the statute itself intervenes and says that the transaction between the club and the members shall be treated as a sale as has been done by the Tamil Nadu General Sales Tax Act, there will be no question of any trading between the club and its members. Any surplus realised from the members would not have the character of income liable to be taxed. " 5. Bearing in mind the meaning and scope of the principle given by the Madras High Court in the aforesaid case, we may now proceed to examine whether, on the facts, the assessee's case falls within its scope. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of properties and not as a result of mutual dealings amongst the members. 7. There is no dispute before us as regards the assessment made in respect of the former category, i.e., income derived from interest on the assessee's bank deposits and securities ; that income, therefore, is outside the purview of the subject-matter of the appeals or cross-objections under consideration. As for the latter category, i.e., income from property, the fact needs to be noted that the letting out of the suites was to the members of the club or their guests, but these guests were not entitled to this facility in their own right or capacity in any manner but only as members' guests ; the booking and occupation of the rooms and suites was made in the name of the member who alone had the right to the facility in his capacity as member of the club ; hire charges were also levied upon and realised from the members. Again what was let out was not only the bare rooms but furnished quarters with requisite toilet accessories such as running hot water, soap, etc., and room service. 8. We may now proceed to examine whether the assessee's case is covered under the principle of mutuality in either of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here shall be four classes, i.e., founder member, patron, life member and permanent member and then enumerated who would be a permanent member. Clause 5 of the revised articles delineates the various classes of members more elaborately so as to include a founder member, patron, life member and permanent member, the last category excluding a subsidiary member which is then defined as constituted of a corporate member, a gymkhana subscriber, an honorary member, lady subscriber and a playing member. According to the Commissioner, this variation in the definition of members did not overcome the infirmity which, in his view, was fatal to the club's claim for mutuality, because one or more classes of members who, although they were contributors to the common fund, were excluded from participating in the surplus. This inference would necessarily follow, according to the Commissioner, since both the offending clauses deprive these classes to claim any assets, of the club upon its dissolution. It is these words, it is contended on behalf of the department, which must lead to the interpretation that the surplus of the common fund was not distributable amongst all the contributors to that fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticipating policies was liable to be taxed even though it was actually returned later on to such policy-holders. The House of Lords by majority held that so much of the surplus was not profit that was taxable...... " 11. Thus, the concept of surplus given to us in Styles' case, in the distribution of which the identity of the contributors to the common fund and the participators must be found so as to invoke the principle of mutuality, is that of the excess of receipts over expenditure found when the annual accounts of the concern claiming to invoke it, are taken. That concept has nothing to do with the surplus that might arise on the dissolution of that concern. Following this concept, the true test to our minds would appear to be to examine whether the benefit of the surplus is available as a matter of right to all the members of the assessee-club, who had contributed to its funds, such surplus being the excess of receipts over the expenditure as found from the annual accounts, and not a hypothetical surplus, which may not even come into existence upon dissolution of the club, if at all it were to be dissolved, on some unknown date in the distant future. We find sanction for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the assessee's case, it cannot be disputed that whatever surplus arose to the club from out of contributions made by all its members constituting its receipts, after defraying expenses, were entirely utilised for providing the benefits and amenities of the club which were without exception available to all the members. It is nobody's case that this surplus was carried to some reserve fund to be accumulated or used in creating assets for distribution amongst any particular class of members on dissolution of the club. Nor was the right of participation in the surplus which was available to all the members destroyed, as the department would have it, merely because there was a possibility of deviation if a hypothetical situation arose in some distant future. 13. We would now proceed to examine the assessee's case on the second aspect of the principle of mutuality set down in Madras Race Club's case i,e., to determine whether there was any trading or profit motive in the transactions between the assessee-club and its members. On this aspect, we are clear in our minds that there was no trade or profit motive indulged in by the assessee-club in these transactions. The Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT [1963] 48 ITR 507. The question which arose in that case was, whether the income from property was assessable in the hands of the trustees of a Baronetcy trust. It was held in that case that since the trustees were the owners of the property and the liability for assessment of the income from property arose from the fact that the assessee was the owner of the property, the annual value of the property was liable to be assessed in the hands of the trustees. No question arose in that case of claiming exemption on the principle of mutuality. For the same reasons, no assistance is available to the department from the rulings of the Bombay High Court in the cases of CIT v. Union Land Building Society (P.) Ltd. [1972] 83 ITR 794 and CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499. 16. For the reasons discussed in the foregoing paragraphs, we would uphold the order of the Commissioner (Appeals) for the two years and dismiss the department's appeals for the years 1977-78 and 1978-79. On the same grounds, we set aside the order of the Commissioner under section 263 for the subsequent two years and allow the asses ..... 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