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TMI Blog1975 (8) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... nature which may seem directly or indirectly conducive to the club's objects, to conduct, hold and promote race meetings and athletic sports, polo, lawn tennis, golf, and other matches, horse and other shows and exhibitions and otherwise utilise the company's properties and sites and to give and contribute towards prizes, cups, stakes and other rewards ; (b) To take over the assets and liabilities of the present unincorporated club known as the Madras Race Club ............ (d) To establish any club, hotels or other conveniences in connection with the company's property. "We have omitted the rest of the clauses of the objects clause as they are not material. Under clause 4 of the memorandum, the income and property of the club whensoever derived was to be applied solely towards the promotion of the objects of the club as set forth in the memorandum of association and no portion thereof was to be paid or transferred directly or indirectly by way of dividend, bonus or otherwise howsoever by way of profit to the members of the club. In clause 5 it was stated that a licence was granted by the Government of India to the club in pursuance of section 26 of the Indian Companies Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sports like golf, billiards, tennis, etc., with all the amenities available in a members' club. The subscription, it was claimed, must be related to those activities and not to the activities of the race club in conducting the races. The fact that the race club was taxable on the income derived from outsiders in the conduct of the races was not in dispute. The Income-tax Officer considered that the provision of such amenities like golf, etc., was not one of the objects of the race club, that the main object of the club was to conduct horse racing and that there was no clause in the objects clause authorising the provision of the aforesaid other facilities extended to members of the clubs. In his view, if there were facilities like golf, they must be construed to be of a secondary nature and in no way connected with the primary object of the club. He, therefore, added back the subscription amounts mentioned above to the business income in making the assessments for the several years. The assessee appealed to the Appellate Assistant Commissioner for each of these years objecting to the assessment of the subscriptions. The appeals for 1961-62 and 1962-63 came before one Assista ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62 and 1962-63 and as it had failed partially for the assessment years 1963-64 and 1964-65 before the Appellate Assistant Commissioner, it filed appeals before the Tribunal for all the years. The revenue filed appeals only for 1963-64 and 1964-65, as only in those years there was modification of the assessment in favour of the assessee to some extent. All the appeals came to be dealt with together by the Tribunal. Relying on clause 3(d) of the memorandum of association, which has already been extracted, the Tribunal considered that the establishment of a club was a separate object, distinct from the object of carrying on the business of horse racing. After referring to the availability of the provision for athletic sports, and for games like golf, lawn tennis, etc., the Tribunal pointed out that the assessee ran a club for the benefit of its members giving them the facilities of playing the aforesaid games and also a bar and a restaurant. It was pointed out that these activities were available to the members throughout the year even outside the racing season. According to the Tribunal the income had to be bifurcated between the business of horse racing and the provision of or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e point regarding the chargeability or otherwise of the subscriptions and that the allowance of expenditure in so far as it was held to be relatable to the subscriptions did not arise out of the Tribunal's order. In the submission of the learned counsel for the assessee the reference to one-third of the receipts in the said question was only descriptive and did not purport to place before the court any problem of computation of income. We have already mentioned that the Appellate Assistant Commissioner purported to give exemption only to the extent of one-third of the subscription. This would be clear from the following passage taken from the appellate order for the assessment year 1963-64 : "Therefore, I have to estimate the profits arising from the club activities. Here the gross receipts shown by the assessee are Rs. 59,660. Against this, the expenses incurred in the management of the club should be deducted and only the balance should be exempted from tax. I would estimate the surplus in the clubs' activities at one-third of the gross receipts. In most of the clubs the membership fee will be spent away in the activities of the club leaving very little surplus...... On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers would be allowed on payment of certain fixed amounts for the use of the golf course. There were enough visitors to avail themselves of this privilege. The revenue authorities sought to assess the entire profits or gains of the golf club consisting of receipts from members and non-members. The court held that in so far as the club engaged itself in granting facilities of playing golf to non-members, it was carrying on a trade or business, and the profit was liable to be assessed. As regards contributions from the members, the principle of mutuality was applied. With reference to the facilities afforded on receipt of "green fees" from non-members, Hamilton J. held as follows : "Now it seems to me that that constitutes engaging in the carrying on of an enterprise which is in itself outside the scope of the club and is distinct from the ordinary objects and activities of the club ;......" I think, therefore, that at the outset the club has, for considerations sufficient in its own view, annexed to its ordinary enterprise of a golf club the rendering of services systematically to strangers for the purpose of obtaining, among other advantages to itself the revenue that those st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court of Appeal went into the applicability of the exemption and came to the conclusion that the assessee was not liable to be taxed. It is well-settled that the memorandum and articles of a company represent the contract between the company and the members. It is only by virtue of their ownership of the surplus assets, if any, that the members had agreed to the clause that they would not take back the surplus, but allow it to be transferred to any similar entity. As they themselves are to deal with the surplus, if any, at the time of winding up, it cannot be said that they are not participators in the surplus. The clause is only a fetter in the manner of disposal. The participation envisaged in the principle of mutuality is not that the members should willy-nilly take the surplus to themselves. It is enough if they had a right of disposal over the surplus to show that they were the participators. Having cleared the ground regarding the above contentions, we have now to address ourselves to the question whether the subscriptions received from the members are taxable. In other words, the point is whether the subscriptions enjoyed immunity from taxation absolutely. It is in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re restricted to members, the Supreme Court held in Commissioner of Income-tax v. Kumbakonam Mutul Benefit Fund Ltd. that the said principle did not apply. Therefore, the fact that the trade was confined to members or shareholders is not decisive of the issue. A company can make profit from its shareholders. 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. On the first aspect we may notice briefly two cases. In Styles v. New York Life, Insurance Company, a company had no shareholders and no shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any does is to collect money from a certain number of people--it does not matter whether they are called members of the company, or participating policyholders--and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case, 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." The Court of Appeal confirmed the above view of Rowlatt J. The principle is that there is no trade between the members inter se in a mutual concern when they have certain mutual dealings intended to confer a common benefit. On the other aspect, it is enough to refer to the decision in Commissioners of Inland Revenue v. Eccentric Club Ltd. A company, limited by guarantee, was incorporated, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers was taxable. Relying on Styles' case, i.e., Styles v. New York Life Insurance Co. 3 and Carlisle Silloth Golf Club v. Smith it was held that under the English Law the income derived by a society or club from its members was not liable to tax and that the same principle should. be followed in India. The Supreme Court referred to this case in Commissioner of Income-tax v. Royal Western India Turf Club Ltd. and observed that the proposition so broadly stated overlooked the decision in Styles' case 2 as explained in later cases and also the real principle in Carlisle and Silloth Golf Club v. Smith. After expressing the disapproval of the reasoning it was observed at page 562 as follows : "His (Martineau J.) decision can only be supported on the ground that the club (the United Services Club) did not really carry on any business with its members with a view to earning profits and, therefore, the surplus of receipts from the members over the expenditure could not be said to be profit of any business which could be assessed to tax." Again, at page 563, after referring to the case of Commissioners of Inland Revenue v. Eccentric Club Ltd. it was observed as follows : "There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no circumstance be held as taxable. If we examine the facts of this case in the light of the above discussion, it would be found that the race club was admittedly carrying on business in horse racing. Have the subscriptions any relationship with this business ? As pointed out earlier, the club members pay an annual subscription of Rs. 100 and are admitted free on race days. The subscription is thus at least in part connected with the business of the racing activity. The contention that the subscription is for the separate activity of a members' club is thus untenable. On the facts herein it appears to us that the club members have paid a contribution in advance to ensure free admission on all race days. The subscription is bound up with the business so that the principle of mutuality will not apply to it. We have no precise idea of the facilities actually available in the club for attendance on non-race days, the expenditure incurred in such running of the club on non-race days and the surplus or deficit left in such activities as such. In the absence of those facts, it is not possible to see how far there is a completely distinct activity of running a members' club and what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible to deal with the claim for exemption in respect of the stand members any further. The Privy Council in English and Scottish Joint Co-operative's case and the Supreme Court in the Royal Western India Turf Club Limited's case, have refrained from deciding what kind of business other than the mutual insurance might claim exemption from tax liability under the principle of Style's case. We would not venture on it. We are satisfied, however, on the facts herein that the said principle has no application to the facts herein. The learned counsel for the assessee relied on a decision of the Delhi High Court in Commissioner of Income-tax v. Delhi Race Club (1940) Ltd. in respect of his submission that the free admission in the enclosures enjoyed by the members was nothing more than a mere privilege referable to their membership without there being a profit-earning motive. In that case the race club had two categories of members, viz., regular members and life members. Regular members were required to pay an entrance fee and annual subscription, while life members paid the subscription for life. There were also stand members and honorary members. The stand members did not pay any ..... X X X X Extracts X X X X X X X X Extracts X X X X
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