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TMI Blog1971 (9) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income-tax, Andhra Pradesh, the Income-tax Appellate Tribunal, Hyderabad Bench, has referred the following question for the opinion of this court : "Whether, on the facts and circumstances of the case, the assessee-club is entitled to exemption from income-tax in respect of its income for the assessment year 1961-62 ? " The material facts leading to the reference may be stated. The assessee is the Merchant Navy Club, Visakhapatnam. By subscribing their names to a memorandum of association filed with the Registrar of Joint Stock Companies under the Societies Registration Act, 1860, some persons formed themselves into a society and got it registered under section 3 of the Societies Registration Act. One of the objects of the assessee-club was to provide recreation for the officers and ratings of vessels of the merchant navies of the world. Three classes of members are contemplated under the constitution of the club. They are : (1) sea going officers and ratings of all vessels of the merchant navies visiting Visakhapatnam ; this class of members do not pay any subscriptions ; (2) executive members of the staff of the steamship agencies carrying on business in Visakhapatnam and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a trading by self with self. In that view the Income-tax Officer held that the surplus was taxable in law and accordingly taxed it. In arriving at the said conclusion, the Income-tax Officer relied upon section 10(6) of the Income-tax Act and also upon the absence of mutuality between the contributors and the participators. Aggrieved by the order of the Income-tax Officer the assessee filed first appeal to the Appellate Assistant Commissioner. It was contended before the Appellate Assistant Commissioner that the assessee was a mutual benefit society inasmuch as even such members who did not pay any subscription had to pay for the amenities which they enjoyed and, therefore, there was identity as a class between the participators and the contributors. The Appellate Assistant Commissioner accepted the said contention of the assessee and held that the surplus of receipts over expenditure was exempt from payment of tax. Aggrieved by the order of the Appellate Assistant Commissioner, the Income-tax Officer went up in appeal to the Income-tax Appellate Tribunal. Before the Tribunal it was contended that, (i) the members who enjoyed the amenities were not only indeterminate but al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... club do not belong to the members of the society, nor when the society is dissolved, do they get back the assets of the club. Therefore, even the members who contribute to the common fund do not participate in the benefits of it. The registered club being distinct and separate from its members sells the amenities, beverages or refreshments to its members. Supply by the registered club as a unit to its members constituted a sale and the amount in excess of the cost of the refreshments, beverages, etc., received by the club from its members, is profit arising out of the sales which is taxable in law. The club is, therefore, like a trading association, trading with its members. In determining whether a particular receipt is taxable or not, the court cannot ignore the transaction which is the source of the receipt and proceed on what they regard as substance of the matter. In support of the above argument the learned counsel relied upon the decisions in Commissioner of Income-tax v. Kumbakonam Mutual Benefit Fund Ltd., Joint Commercial Tax Officer v. Young Men's Indian Association, Commissioner of Income-tax v. B. M. Kharwar, and Pamulapati Buchi Naidu College Committee v. Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso invited our attention to the state of law regarding mutual society expressed in Gunn's Commonwealth Income Tax Law and Practice and G. S. A. Wheatcroft's Law of Income Tax, Surtax and Profits Tax. The Income-tax Act levies tax on income or profit. Before assessable profits can arise from a business there must be two parties to the transaction, the person who makes the profit and the person from whom the profit is made. Where those two parties are identical, that is one and the same, no assessable profits can arise. If instead of one, more persons than one have combined for the purpose of supplying themselves with goods or services and any surplus arising from such transactions is returnable to those persons in their character of purchasers or consumers, the surplus is not assessable. In paragraph 79, at page 36, in Gunn's Commonwealth Income Tax Law and Practice, the law as prevailing in the Commonwealth is succinctly stated thus : " So long as the ownership of the surplus is restricted to those who provided it as a class it is not assessable, and it is immaterial that it is not immediately distributed to its members, but is held in reserve, or that it is not distributed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, on the other hand, have given a finding that they are genuine members. We, therefore, hold that the revenue cannot be permitted to raise at this stage that non-paying members are not genuine members. The finding that the non-paying members are genuine is binding. We also hold that there is no substance in that contention. Although before the income-tax authorities and the Tribunal the department had taken the stand that the sale of the refreshments, beverages, etc., are services rendered by the paying members to the non-paying members, still there is nothing in law which prevents the revenue from contending that the sales are by the society as an entity to its members. No fresh facts are needed for raising such a plea. It is only on the admitted fact or facts found by the Tribunal such a plea has been raised. Therefore, the revenue is competent and entitled to raise such a plea on facts which are on record. The paying members contribute to the common fund of the club by paying subscriptions. They also contribute to the club by paying something extra over the cost for the amenities they receive from the club. Similarly, the non-paying members also contribute to the club by p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it. That, as I understand it, is the effect of the decision in the New York case. " The question of taxability of the surplus received by a mutual benefit society came up for decision before the Supreme Court in Commissioner of Income-tax v. Kumbakonam Mutual Benefit Fund Ltd. The facts of that case are as follows : Kumbakonam Mutual Benefit Fund Ltd., being incorporated under the Companies Act, was a company, limited by shares. It carries on banking business restricted to its shareholders. The shareholders are entitled to participate in the various recurring deposit schemes of the assessee or to obtain loans on security. Recurring deposits are obtained from members for fixed amounts to be contributed monthly b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 10 of the Indian Income-tax Act. " Their Lordships of the Supreme Court observed in the body of their judgment that where there is a separate entity or where there is a company, the test is that one has to look at the subscribers and at the participants and see if they are the same. The property was not the property of the assessee : it was the property of the members themselves. It is that feature which Chagla. C.J. failed to notice in Ismalia Grain Merchants Association v. Commissioner of Income-tax. We will next proceed to consider the cases cited by the learned counsel appearing for the assessee. In United Service Club v. Crown Martineau J. of the Lahore High Court observed thus : " I see no essential distinction between the case of such an association and that of a club whose members subscribe for their mutual benefit, and I do not think that the money received by a club from the members composing it can be properly regarded as 'income', a word which itself seems to imply something received from outside. " In Commissioners of Inland Revenue v. Eccentric Club Ltd. the facts were that the assessee, the Eccentric Club Ltd., was a company incorporated under the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held to be a trade, and the colportage which was held not to be of that character. " In Faulconbridge (H. M. Inspector of Taxes) v. National Employers' Mutual General Insurance Association Ltd. Upjohn J. observed that : " If members instead of receiving back part of their surplus contributions by way of bonus, prefer to leave them with the association to attract more members to come in, or to provide additional reserves to cover additional classes of insurance, I do not see how that alters the character of the surplus, nor why the principle of mutuality is thereby affected. " In Pamulapati Buchi Naidu College Committee v. Government of Andhra Pradesh Satyanarayana Raju J., dealing with the status of a registered society observed thus : " By reason of the provisions of the Societies Registration Act, 1860, once the society is registered with the Registrar, by the filing of the memorandum and certified copy of the rules and regulations and the Registrar has certified that the society is registered under the Act, it enjoys the status of a legal entity apart from the members constituting the same and is capable of suing or being sued. But the members of the society or the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e supplies made by the assessee-club to its members cannot be considered as sales by the club to its members. There is no element of transfer in the supplies made by the club to its members. Therefore, the element of taxable profit is lacking in this case. As we have already stated above both the paying members and the non-paying members contribute to the common fund. The paying members may contribute to the common fund by paying their subscriptions. The non-paying members also contribute to the common fund by paying something extra over the cost of the amenities supplied to them. Therefore, both the paying and non-paying members contribute to the common fund. From the aforesaid discussion the principles of mutuality that emerge from the decided cases may be stated thus : No person can trade with himself and make an assessable profit. If instead of one person more than one combine themselves into a distinct and separate legal entity for the purposes of rendering services to themselves or for the supply of refreshments, beverages, entertainment, etc., by over-charging themselves, the resulting surplus is not assessable to tax if the surplus is to be refunded to the members. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers in supplying the beverages or refreshments, etc., on behalf of the members to the members who demand them. In coming to the above conclusion we are not ignoring the legal form or character of the supplies. In fact, the property, although in law belongs to the club, for all practical purposes is the property of the members of the club. The facts of the case, therefore, clearly bring this case under the principle laid down in Styles' case. No sales are effected by the club and as such there is no trade for profit. We, therefore, hold that the surplus received by the club is not a profit from business assessable under section 10 of the Indian Income-tax Act, 1922. Since the club has not been formed for the purpose of making profits by trading, it is not a trade association. The surplus of receipts over expenditure derived by the assessee-club does not go to any person in the capacity other than as contributor or consumer. Therefore, the assessee club is not a trade association nor is the excess a profit taxable as income from other sources. We, therefore, answer the reference in the following manner : Surplus received by the assessee-club is not income. It is therefore, not ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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