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TMI Blog1997 (5) TMI 392X X X X Extracts X X X X X X X X Extracts X X X X ..... them. On further verification, it turned out that in seven appeals, the point that arises for consideration is a little different. On the question arising in those appeals no arguments were advanced. So, the said seven appeals are delinked, to be posted later for hearing. For convenience' sake, the 23 cases including the seven appeals which are delinked can be classified into five groups : Group A : C. A. Nos. 854-858 of 1984--CIT v. Banhipur Club Ltd. ; Group B : C. A. Nos. 505 of 1992 and 3974 of 1992--CIT v. Ranchi Club Ltd. ; Group C : C. A. No. 3382 of 1997 (arising out of S. L. P. (C) No. 22644 of 1994) and C. A. No. 10194 of 1995--CIT v. Cricket Club of India ; Group D : C. A. Nos. 1635 of 1994, 1648-49 of 1994, 2380-82 of 1994 and C. A. No. 3383 of 1997 (arising out of S. L. P. (C.) No. 2811 of 1994)--CIT v. Northern India Motion Pictures Association ; Group E : C. A. Nos. 4777-78 of 1989, 4534 of 1991, 8046 of 1995, 1773/(NT) of 1992, 4303 of 1995 and 3840 of 1996--CIT v. Cawnpore Club Ltd. As stated earlier, the appeals coming within Group E--CIT v. Cawnpore Club Ltd. (seven appeals) are delinked and they will be posted separately to be heard on the merits. We shall ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. Members' clubs are an example of a mutual undertaking ; but, where a club extends facilities to non-members, to that extent the element of mutuality is wanting ...... (emphasis supplied). Simon's Taxes, Volume B, Third edition, paragraphs B1.218 and B1.222 formulate the law on the point, thus : ". . . . it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore, no assessment in respect of the trade can be made. Any surplus resulting from this form of trading represents only the extent to which the contributions of the participators have proved to be in excess of requirements. Such a surplus is regarded as their own money and returnable to them. In order that this exempting element of mutuality should exist it is essential that the profits should be capable of coming back at some time and in some form to the persons to whom the goods were sold or the services rendered. . ." " It has been hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs and, thirdly, to members' clubs, and mutual associations generally, whether incorporated or unincorporated, except registered industrial and provident societies . . . . . . (emphasis supplied). It should be noticed that in the case of a " mutual society or concern " (including a " members' club "), there must be complete identity between the class of contributors and the class of participators. The particular label or form by which the mutual association is known, is of no consequence. The said principle which has been laid down in the leading decisions and emphasised in the leading English text books mentioned above, has been explained with reference to Indian decisions in " The Law and Practice of Income-tax " (Eighth edition, Volume I, 1990) by Kanga and Palkhivala at page 113, thus : " . . . . ' The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid.' The Madras, Andhra Pradesh and the Kerala High Courts have held that the test of mutuality does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mains any property left after the satisfaction of all debts and liabilities, the same shall be paid to and distributed amongst the members of the company in equal shares. Article 6 of the articles of association reads thus : " Only permanent members shall be deemed to be members of the club." Article 15 speaks of temporary members who may be elected for not exceeding three months in any calendar year. To become a temporary member the person would be a person not permanently residing at Patna or within ten miles of it. No entrance fee is payable by them, but they are to pay a fixed monthly subscription. Under article 5, the Governor and the Chief Minister of the State may be invited by the committee to become honorary members of the club. Article 17 is a provision for giving to the temporary and the honorary members all the privileges of the club, subject to such restrictions and regulations as may be prescribed by the rules or bye-laws of the club. They have, however, no right to vote at a meeting or be elected on committees or bring any guest. The assessments were upheld by the Appellate Assistant Commissioner. In second appeal, the Appellate Tribunal accepted the plea of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e common fund of the club, guarantee towards debts and liabilities, and upon winding-up, their participation in the surplus. Apart from the concept of " member " envisaged in the memorandum, it had created one more class described as temporary members. The temporary members were not deemed to be members. For the assessment year 1977-78, the assessee had filed its return showing its income under the head " House property " representing the income arising out of gross rent and reservation charges received by it from persons other than members. But, the Income-tax Officer, while assessing the income, also included the amount received by the assessee even, from its members on account of rent from the club property and the receipts on sale of liquor, etc., to its members and their guests. The decision rendered by the High Court as summarised in the headnote [1992] 196 ITR 137, at page 139) is as follows : " . . . . that merely because the assessee-company had entered into transactions with non-members and earned profits out of transactions held with them, its right to claim exemption on the principle of mutuality in respect of transactions held by it with its members was not lost. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above appeals are as follows : Sl. No. No. Assessment years Remarks 1. C. A. No. 1635 of 1994 1987-88 Application under section 256(2) rejected 2. C. A. Nos. 1648-49 of 1982-83 and 1994 1985-86 -do- 3. C. A. Nos. 2380-82 of 1974-75 to 1994 1976-77 Reference answered in favour of assessee 4. S. L. P. (C.) No. 2811 of 1994 1989-90 Application under section 256(2) rejected The assessee is an association consisting of film distributors and exhibitors incorporated as a company under section 25 of the Companies Act, 1956 (section 26 of the Companies Act, 1913) in the year 1949. The income of the association consists of (i) admission fees, readmission fees, periodical subscriptions from the members, etc., under the head " Others " and (ii) service charges from the members for rendering specific services to the members under the head " Service to the members ". The income under the head " Service to the members " was always offered for tax and assessed to tax under section 28(iii) of the Act and there is no dispute about the same. The income under the head " Others " was claimed to be not taxable on the principle of mutuality. The claim of the assessee for exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that, upon winding-up or dissolution of the association, the remaining property, after the satisfaction of its debts and liabilities, shall not be paid or distributed amongst the members but shall be given or transferred to such other institution or institutions having similar objects to be determined by the members at or before the time of dissolution, or in default thereof by the Prime Minister of the East Punjab and if this could not be done, then, to some charitable object and hence the amount was not to go back to the members. The Tribunal, however, held that the income of the assessee was not taxable. On a reference : Held, that the contributors by incorporating clause 7 did not deprive themselves of the control on the disposal of the surplus. Ultimately, they could agree to divide the surplus among themselves or to contribute the amount to a similar association or to a charitable trust. The assessee was a mutual benefit association and its income was not taxable. " The said judgment was followed subsequently in all matters arising under sections 256(1) and 256(2) of the Act. So, for the assessment years which are the subject-matter of cases falling under Group-D stated h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e members of the clubs were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective clubs. It has also been found that different clubs realised various sums on the above counts only to afford to their members the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done with any profit motive, and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any, availing of the facilities occasionally). In the light of the above findings, it necessarily follows that the receipts for the various facilities extended by the clubs to their members, as stated hereinabove, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, cannot be said to be " a trading activity ". The surplus--excess of receipts over the expenditure--as a result of mutual arrangement, cannot be said to be " income " for the purpose of the Act. Our attention was invited to a few decisions wh ..... 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