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TMI Blog1980 (10) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... s to afford to its members all the usual privileges, advantages, conveniences and accommodation of a club. Clause 5 of the memorandum of association makes a provision that upon a winding-up or dissolution of the company, if there remains 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. Articles of association under art. 6 reads: "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 art. 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, howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re taken to be outsiders for this purpose or not. The orders passed by the authorities below are set aside to this limited extent only. The total income should be recomputed and assessments made in the light of these directions." Being aggrieved by the aforesaid decision of the Appellate Tribunal, the Commissioner moved the Appellate Tribunal under s. 256(1) of the Act for making a reference to this court. Accordingly the present references have been made and the two questions which have already been quoted above have been referred. I may state here at the outset that the statement of the case made by the Income-tax Appellate Tribunal, as printed in the paper book at pp. 42 and 43, is incomplete inasmuch as a major portion of the statement has been left out from printing. Accordingly, we got a copy typed from the original and we are using the same for the purpose of this case. The Tribunal found that as regards sales to regular members, the profit arising from sales to them is not liable to be taxed on the principle of mutuality. As regards temporary members, it remanded the case to the ITO for a fresh decision and it left open the question as to whether temporary members will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manent members or temporary members. The bar in question where drinks are sold is open to its members, both permanent as well as temporary, and no outsider can purchase any drink from the said club. It cannot be disputed, therefore, that while selling drinks to these members, it does not do with a motive of profit earning which can be said to be tainted with commerciality. The members pay the monthly sub-scription and in addition they enjoy the benefit of this privilege of supply of drinks to them on additional payment. There cannot, therefore, be any profit-earning motive so far as these transactions are concerned. The club, it is not disputed, is owned by the members and cl. 5 of the memorandum of association about which I have already stated above, speaks of distribution of the surplus assets amongst the members of the company in equal shares upon a winding-up and dissolution of the club. The difference between the members, who are permanent and the members who are temporary is only this that the temporary members have no right of voting or election on any of the committees. Before discussing the two cases cited at the Bar, I wish to refer to decision of the Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dealings in both cases disclose the same profit-earning motive and are alike tainted with commerciality." In the present case, the club does not deal with any outsiders in relation to the transaction for sale of drinks. It is confined only to the members The club, as pointed out above, is also owned by the members and, therefore, the transaction in question would not amount to a sale by the members to its members. It is also not disputed that all the members are entitled to participate in this privilege and the income under this head is applied towards the club for either re-purchasing drinks or adding further privileges for the members. The aforesaid Supreme Court decision has pointed out that what was liable to tax was the receipt in respect of dealings which disclosed the profit-earning motive and tainted with commerciality. In that case apart from entrance fee and periodical subscriptions, the members paid admission ticket fees for entrance in the race course stand just as the non-members paid. It has been held in that case that this was tainted with commerciality and, therefore, taxable. Now, I come to the decision cited by Mr. Rajgarhiya, namely, Kumbakonam Mutual Benefi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was not the property of the association; it was the property of the members themselves ......' It is this feature of the case which Chagla C.J. failed to notice in Ismailia Grain Merchants Association v. Commissioner of Income-tax [1957] 31 ITR 433 (Bom). " Thus, the principle laid down in the case of the Supreme Court discussed above does not go against the contention put forward on behalf of the club. I shall now discuss the case cited by Mr. K. P. Sinha in Merchant Navy Club [1974] 96 ITR 261 (AP). The facts as argued by Mr. K. P. Sinha is similar to the present case. In this case, the assessee was a club registered under the Societies Registration Act. One of the objects of the club was to provide such amenities to the members on payment of their cost plus some extra amount. The extra amount so realised was utilised by the club for the maintenance and improvement of the club. The amenities were provided to both paying and non-paying members, but only on payment. The amenities were not allowed to outsiders. For the assessment year 1961-62 there was a surplus after meeting all the expenditure of the club. The ITO relying upon s. 10(6) of the Indian I.T. Act, 1922, held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members in cash or is put to reserve with the club for its development and for providing better amenities to its members. When the body of individuals is incorporated into a company or formed into a registered society, what is essential is that it should not have dealings with an outside body which: results in surplus. The participation of the members in the surplus must be in their character as contributors to the common fund or as consumers, and not as shareholders getting dividends on their share amount or as debenture holders earning interest. In all cases of incorporation as a company or as a registered society, the proper mode of regarding the company or the registered society is that it is a convenient instrument or medium for enabling the members to conduct a social club, the objects of which are immune from every taint of commerciality. The property of the incorporated company or a registered society, for all practical purposes in this behalf, is considered as property of the members. A members' club formed for social intercourse and for either recreation or for cultural activities cannot be considered to trade for profit so as to make its surplus taxable in law when i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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