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TMI Blog1969 (8) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... f or adjusted against the said profits under section 10 of the Income-tax Act as loss and depreciation of a different business?" The case stated by agreement between the parties while referring the questions is as follows: The assessee is a limited company incorporated in 1926, under the Indian Companies Act, 1913. The assessments under reference are excess profits tax assessments for the chargeable accounting period ended March 31, 1946, and income-tax assessments for the years 1948-49 to 1952-53 (both inclusive). The accounting period for the excess profits tax assessment is the year ending March 31, 1946, while the accounting periods for the income-tax assessments are the years ended June 30, 1947, June 30, 1948, June 30, 1949, June 30, 1950, and June 30, 1951. The objects for which the company was incorporated were, inter alia, as follows : 1. to carry on the business of a race-course company ; 2. to establish any clubs, hotels and other conveniences in connection with the property of the company ; and 3. to carry on the business of hotel-keepers, tavern-keepers, licensed victuallers and refreshment purveyors. The company was running a club house in Poona and refr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 1949-50, rejected the claim of the company. His grounds for rejecting the claim are given in paragraph 7 of his order, which is reproduced below : " In the original return submitted by the club, they had themselves excluded a sum of Rs. 66,460 being loss in the turf club house. After the decision of the Supreme Court, they have now claimed that this amount should be deducted from their total income as the club is doing business of hotel-keepers, tavern-keepers, victuallers and refreshment bars keepers. A summary of income and expenditure for the 10 years ended 30th June, 1948, shows that the club started having separate accounts for the turf club house from 1944-45 accounting year onwards. The figures of the last four accounting years are as under : 1944-45 86,193 1945-46 23,177 1946-47 69,732 1947-48 66,460 Earlier to 1944-45 separate accounts of the club house were not prepared. The above-mentioned amounts were neither claimed nor allowed, on the ground that the club members did not make loss or profits out of themselves. It was held that there was an identification between the contributors and the participators. The entrance fees received from the members an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the Supreme Court was whether four items of receipt pertaining to the racing business were to be included in computing the appellant's total income. 4. I have discussed with the appellant's representative the facts regarding the running of the turf club house. In my view, it cannot be said that the appellant in running the club house is carrying on any business. The club house is open only to the members of the club and their guests. The charges for the guests are received from the members and not from the guests. Amenities like billiards, facilities for playing cards, etc., are provided. The club is being run at a heavy loss from year to year. The very fact that the appellant is running the club at a heavy loss year after year shows that this does not form a part of the appellant's business activity. It is only an amenity offered to the members of the club as part consideration of the subscription received from the members. 5. The running of the turf club house cannot also be regarded as an activity connected with the horse racing business. The club house is open not only on race days but also on other days during the Poona season. During some years the turf club was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner ought to have allowed the expenditure incurred or the loss suffered in running the turf club house and the kiosks in computing the business profits of the assessee under section 10 of the Indian Income-tax Act. 2. The Appellate Assistant Commissioner ought to have held that running the club house and the kiosks, or, in any event, running the kiosks was part and parcel of the business of running the race course and consequently the expenditure incurred or the loss sustained on the club house and the kiosks, or in any event, on the kiosks, should be allowed as a deduction in computing the profits of the race course business. 3. Without prejudice to the immediately preceding ground and, in the alternative, it is submitted that the Appellate Assistant Commissioner ought to have held that even assuming the club house and the kiosks did not form part of the race-course business, the loss incurred in running the club house and the kiosks was a loss incurred in a different business and should be set off under section 10 against the profits made in the race-course business. 4. The Appellate Assistant Commissioner erred in holding that the observations in the Supreme Court ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) and it is in pursuance of this court's order on that application that this case is stated with reference to the questions of law already set out earlier. All the necessary facts and the view taken by the different authorities have been incorporated in sufficient detail in the statement of the case, and it is not necessary for us to repeat any other facts. In support, of this reference, it is urged on behalf of the applicant that the view taken as regards the assessee-company carrying on the business of hotel-keeping when it runs the club house at Poona ignores the nature of the activities of the company and the business for which those activities are undertaken. A printed memorandum and articles of association of the Royal Western India Turf Club Ltd. was made available at the hearing, and amongst the objects for which the club is established, the one other clause (b) is as follows : " (b) To carry on the business of a race-course company in all its branches and, in particular, to lay out and prepare any lands for the running of horse races, steeple chases, or races of any other kind and for any kind of athletic sports, and for playing thereon, and to permit the playing, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pay, are also elaborately provided. The manner in which a person can be elected a member has also been given in detail in the articles of association. In other words, it is an incorporated member club which is a term under the Companies Act and is a separate entity different from the members. As stated in paragraph 4 of the statement of the case, the assessee is running a club house in Poona and also providing refreshments in kiosks both at Bombay and Poona, both facilities being for the benefit of members only. Year after year, and particularly in the years of assessment with which we are concerned in this reference, the assessee-company suffered loss in each of these years so far as the club house at Poona is concerned. There is no clear statement in the statement of the case whether the expenses over refreshment kiosks at Bombay and Poona were also an item of loss. But it was stated at the Bar on behalf of the assessee-company that so far as the running of the kiosks was concerned, they were not generally run at a loss. The deduction claimed by the assessee-company so far as we have been given to understand is in respect of the loss suffered by them in running these two c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... show that outsiders were admitted to the privileges of the club house or amenities provided in the club house at Poona. In paragraph 4 of the statement of the case it is stated that up to December, 1965, the club house was open to the members and their guests, and boarding and lodging was provided and available exclusively for members, their wives and unmarried daughters. According to the department, if the admission was so restricted to members, their wives and unmarried daughters, it could not be said that the assessee-comany was doing business, viz., the business of hotel-keeping only for the purpose of benefit of such members as would come to Poona and occupy the hotel accommodation. In order that an activity may be properly considered to be a business, the argument runs, the facility must be open or the services must be available to outsiders, that is to say, to non-members or to whosoever wants to avail of the facility on payment of the charges which are fixed. It is also suggested that it is on this footing, that the activity carried on by the club of horse racing, where both members as well as non-members were admitted to enclosures for the same payment and charging the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less the activity was such as to give benefit to both members and non-members as well as outsiders to the same extent and on the same terms, it could not be said that the assessee was carrying on a "business." Some other decisions were also relied upon in support of the contention that the activity of the club house run at Poona is not business activity, or does not amount to carrying on business for the assessee at Poona. Carlisle and Silloth Golf Club v. Smith (Surveyor of Taxes), is a case where a golf club, unincorporated and, admittedly, a bona fide members' club, was bound under a clause under its lease to admit non-members to play on its course on payment of green fees to be fixed by the lessors but not to be below a minimum named in the lease. These green fees were paid by the nonmembers themselves and entered into the general accounts of the club, which showed an annual excess of receipts over expenditure. The Court of Appeal 2 ultimately held that the club, for income-tax purposes, carried on a concern or business which is capable of being isolated and defined and in respect of which it received remuneration that is assessable. The point of distinction that was made was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ltd., Commissioners of Inland Revenue v. South Behar Railway Co. Ltd. and Commissioners of Inland Revenue v. Eccentric Club Ltd., which deals with three different kinds of assessees, but we are concerned here with the last one, viz., the case of the Eccentric Club Ltd. This case has been noticed by the Supreme Court in Commissioner of Income-tax v. Royal Western India Turf Club. In that case of the Eccentric Club Ltd., a company, limited by guarantee, was incorporated, inter alia, to conduct a social club and to provide refreshments to members for payment. It was a members' club and not a proprietary club, the members of the company and the club being identical. By its memorandum and articles of association the income and property of the club were to be applied towards the promotion of the objects of the club, no member being entitled to receive any dividend or bonus out of the profits, and on winding up any surplus was not to be distributed to members, but was to be dealt with as the committee of the club might determine. There were no receipts from anything in the nature of trade from persons other than members, and the company had not been assessed to income-tax in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a members' club and not a proprietary club, nor any undertaking of a similar character. That in such a case one may go behind technicalities and look at the substance is I think shown by the mode in which the House of Lords dealt with a question, similar in this respect, in New York Life Insurance Co. v. Styles. That transactions of sale and purchase may be merely incidental to non-commercial objects and not regarded as in themselves a trade is in my opinion shown by the contrast recognised by the courts in Religious Tract and Book Society of Scotland's case, between the book-selling business which was held to be a trade, and the colportage which was held not to be of that character ; and in Young Men's Christian Association v. Groves, between the public restaurant and the educational and religious undertaking, although the latter involved the taking of fees from members attending classes, and so forth." Thus, it would appear that having regard to the objects for which the company was formed--which was a purely social and cultural object, the court took the view that its activity could not be said to partake of business or the character of a business. Commissioners of Inland R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was confined to the profits made from non-members. At page 503 Finlay J. observed as under : " The point which arises, and on which I have had the benefit of a very full argument, is a point no doubt of importance and difficulty. I shall have to refer to the facts a little carefully, but there is this association, the National Association of Local Government Officers. It is an unincorporated association, and I think that is a matter of fundamental importance. The result, of course, is that the association is in the position of a club. The property belongs to the members, and it is a fallacy, as has been pointed out in several cases, one at least of which was cited to me, to say in the case of such a club that, where a member orders a dinner and consumes it, there is any sale to him. There is not a sale. The fundamental thing is that the whole property is vested in the members." Then later, at pages 505, 506, referring to the Liverpool Corn Trade Association case , the learned-judge observed as follows : " The fundamental point there was that people cannot trade with themselves. There was no outside trade ; it was simply the return to a subscriber of an amount in excess of wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Poona merely because the facility of that hotel or club house is restricted to members, their wives and their unmarried daughters as also their guests. It has to be remembered that the objects of the association in no uncertain terms include the running of a hotel or a catering establishment or doing the business of licensed victuallers or hotel keepers or tavern keepers and this is one of the declared objects for which the company is formed. It is also one of the objects of the company to establish any clubs, hotels or other conveniences in connection with the property of the club. The association is an independent entity distinguished from its members. The charges that are levied for the services rendered by the club and the accommodation offered there are only payable on behalf of the members or their guests or their relations who actually use the premises and avail of the facilities of the club house, and not by any other member. In this state of affairs, therefore, the principle of mutuality and mutual benefit, which, in our opinion, is a true basis for exclusion of any activity as a business or a trading activity, cannot be found in the activity carried on by the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hareholders and at the end of a fixed period returned an amount covering the deposits and guaranteed interest thereon for that period. Loans were granted to those shareholders who applied for them and interest was realised on those loans. A shareholder was entitled to participate in the profits as and when dividend was declared, even though he had not taken any loan from the respondent. The question was whether the respondent was assessable to tax on the profits derived from these transactions with its shareholders. The court held that there was no such complete identity between the contributors and the participators in a common fund as attracted the principle of mutuality. The position of the company was not different from that of an ordinary bank and its income was income from business within section 10 of the Indian Income-tax Act, 1922, and was therefore taxable. A shareholder in the respondentcompany was entitled to receive his dividend as long as he held a share. He did not have to fulfil any other condition. His position was in no way different from that of a shareholder in a banking company. It was further held that the essence of mutuality lies in the return of what one ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business may be conducted or continued even though it results in loss if the business to be secured by continuance of such a business activity is to ensure a steady stream of customers or to extend the facility to customers even though trading in that particular article may not result in profit. Instances in point would be a subsidised canteen or a cheap grain shop where there is always excess of expenditure over income and yet the activity is continued for the benefit of those who otherwise contribute to the prosperity of the undertaking. We are, therefore, unable to hold that the mere fact that the activity of running a club house at Poona showed a loss continuously during the different periods of assessment concerned, or that the facility or privilege was restricted to members, their guests and families, would rob the activity of its character as a business. We must, therefore, hold that the activity of running a club house carried on by the assessee-company at Poona was in the nature of carrying on a business, and the assessee was entitled to claim adjustment of the amounts incurred as loss in that business in the computation of income. The other activity, which is the subje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owable as a business expense. The same view was taken in respect of the club house at Poona. The learned counsel relied upon several decisions such as Commissioner of Income-tax v. Royal Calcutta Turf Club ; Eastern Investments Ltd. v. Commissioner of Income-tax, Sree Meenakshi Mills Ltd. v. Commissioner of Income-tax, Jamshedpur Engineering and Machine Manufacturing Co. Ltd. v. Commissioner of Income-tax, and Commissioner of Income-tax v. Nainital Bank Ltd., where different kinds of expenses incurred for the purposes of maintaining, continuing, saving or increasing the business were held allowable. Thus, where the turf club established a school for training Indian boys as jockeys : Commissioner of Income-tax v. Royal Calcutta Turf Club, where an investment company entered into an agreement to reduce its share capital for taking over another person's shares of the value of 50 Rs. lakhs and the vendor agreed to forgo cash payment and receive debentures of this value of equal amount and sanction of the court was obtained : Eastern Investments Ltd. v. Commissioner of Income-tax, or where the action of a textile mill in regard to the expenditure incurred in fighting out a civil proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3(b) of the memorandum of association, viz., that the club is empowered to construct refreshment rooms and other erections and conveniences which may be directly or indirectly conducive to the objects of the club. The object of the club, among other things, being mainly to carry on the business of horse-racing, all these amenities which are incidental to the carrying on of this business must be considered as proper expenses and if the expenses are in excess of the income recovered by charging for the services, that itself cannot be considered but as expenses properly laid out for the purpose of the business. It is not necessary that there is a direct quid pro quo between these services and facilities which are offered and made available to the members and the benefit which the assessee gets in the increase in the amount of betting or the business of running a race course. The advantage undoubtedly is indirect ; but the need to provide these facilities in order to preserve the goodwill and co-operation of the members and to encourage them to patronise the activities for which the assessee-company is founded is obvious. In fact, in the case which came before the Supreme Court in re ..... 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