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TMI Blog1993 (8) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... . 5,23,810, interest on Fixed Deposit amounted to Rs. 40,767 and Sundry receipts and income came to Rs. 93,968. The net surplus on the amenities provided to the members including catering came to Rs. 5,58,287. As per the income and expenditure account, the excess of income over expenditure which was carried to the members' capital account in the balance sheet was Rs. 2,76,866. The Income-tax Officer required the assessee to furnish a break-up of the sales of Rs. 31,09,786 in the catering division. The break-up furnished by the assessee included Rs. 19,36,540 as representing sales of coupons. While processing the sales account in the Catering Division of the Club, the Income-tax Officer found that in respect of the sales other than coupons sales, it was possible to identify the members to whom the services or the sales were made, but that it was not possible to identify the persons to whom sales or services were rendered by the Club against sale of coupons. From this fact, the Income-tax Officer inferred that the assessee was not able to establish the complete identity of the contributors so far as the coupons sales are concerned. He also took the view that since no details regardin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no appeal has been preferred for the assessment year 1982-83. In the present appeal, the following grounds have been taken :--- "1. That, the learned Commissioner of Income-tax (Appeals) erred in holding that the assessee did not carry on any trade and commercial activities. 2. That, the learned Commissioner of Income-tax (Appeals) is not correct in holding that income from rendering services to members is exempt. 3. That, the learned Commissioner of Income-tax (Appeals) has not considered the provisions of section 28(iii) of the Income-tax Act. 4. That, the income by way of interest from fixed deposit is taxable in view of the Allahabad High Court decision in CIT v. Wheeler Club [1981] 127 ITR 264 (sic). 5. That, the services like supply of food and drinks to members should be treated as commercial activity. 6. That, the learned Commissioner of Income-tax (Appeals) is not correct in holding the taxable income to be the 'Nil'." 5. The ld. departmental representative contended that the assessee's claim that its income was exempt from income-tax on the principle of mutuality cannot hold good on the facts of the case, since according to him the presence of non-memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee, entertained certain doubts on the question of the applicability of the principle of mutuality to the facts of the present case and required the assessee to clarify certain issues. It was also noticed that the West Bengal Taxation Tribunal (W.B.T.T.), in the assessee's own case arising under the Sales-tax Act, has held that the assessee-club is not a members' club, and therefore the principle of mutuality is not applicable. It was further held in that decision that there was no identity between the members and the club, and therefore the principle of mutuality was not applicable. This decision is in Bengal Rowing Club v. CCT [1993] 88 STC 389 (West Bengal Taxation Tribunal). In view of the doubts entertained by the Bench and the clarifications sought for and in view of the decision of the W.B.T.T. in the assessee's own case, the matter was posted again and the case was argued fully both on behalf of the assessee as well as on behalf of the Department. All the doubts that arose were put to the assessee wherever necessary and clarifications were obtained. The decision of the W.B.T.T. was also put to the assessee. We have obtained clarifications on all the above points. We shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one of the privileges among the various privileges which a member of the club can enjoy once he becomes the member. The club exercises adequate control, as per the by-laws, over the introduction and regulation of the guests. This is clear from the by-laws of the club relating to the guests extracted above. 9. As per the articles of association, the following are the various privileges of the members of the club : Privileges of Members "12. Ordinary members shall be entitled to the following rights and privileges : a. To be present and vote at all General Meeting either in person or by proxy, and every ordinary member shall have one vote. b. To propose and second candidates for Membership. c. To have personal access to the Library, playing grounds and other public rooms, of the Club and take part in all games and entertainments provided by the Club, subject to such rules and restrictions if any, as may for the time being be prescribed by the Committee. d. To introduce visitors to the grounds and public rooms of the Club during the hours these are open to members, subject to such rules and restrictions as may for the time being be prescribed by the Committee. e. To fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided that such surcharge may be paid in one or more instalments as the committee may decide and the committee is authorised to modify the amount payable within these limits or withdraw such surcharge as and when it may deem fit in its discretion and judgment and subject to the condition that such surcharge shall not be imposed on such members more than once in every ten years beginning from the date of the first instalment." As per clause 16 of the Articles, a member other than the ordinary member may become an ordinary member by applying in the appropriate form and paying the appropriate fees. The Ordinary members, under clause 15 of the Articles, are allowed to become life members of the club by making an one-time non-refundable deposit. It will be seen from the aforesaid clauses of the Articles, that there are different types of the members in the assessee-club who are entitled to different privileges and different services of the club. As per rules 66 to 73 of the general rules of the club. Rowing members shall have the privileges of enjoying all the Rowing facilities of the club free of charge. However, Rowing members are not allowed to introduce guests. He can bring his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the club by paying something extra over the prices of those amenities provided to them by the club. It is, therefore, not correct to say that non-paying members do not contribute to the common fund of the club. On the facts it is evident that both paying members as well as non-paying members as a class contribute to the common fund of the club." 12. It will be evident from this case that the fact that there are various classes of members entitled to different amenities and privileges of the club is not destructive of the principle of the mutuality. The true ratio of the judgment is that restricted participation of the different types of members does not destroy the principle of mutuality. 13. In the case of CIT v. Darjeeling Club Ltd. [1985] 153 ITR 676, the Calcutta High Court was dealing with the case of Darjeeling Club Ltd. That Club had three types of members : (1) permanent; (2) temporary; and (3) honorary. All the three categories of members were entitled to the same privileges as the permanent members. The argument raised on behalf of the Revenue in that case was that there were some temporary and honorary members of the Club and therefore profits arising out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made in the last paragraph, are a complete answer to the querry specifically raised by us. It is clarified by the Calcutta High Court in that decision that it is immaterial that there are different classes of members entitled to different privileges, and it has been stressed that what is important is that the members as a class must be entitled to the benefits, amenities and privileges provided by the Club. Applying this ratio to the facts of the present case, we find that though there are different classes of members whose rights and privileges are regulated in different ways, the members of the Club as a class are entitled to the privileges of the Club. It is, therefore, not possible to hold that the principle of the mutuality is destroyed merely because the members are allowed to introduce guests or that certain classes of members are not allowed to enjoy the privileges enjoyed by certain other classes of members. The right given to an Ordinary member of the club under Clause 12(d) of the Articles, to introduce visitors to the premises of the Club subject to the rules and regulations in this regard is referable to his membership in the Club and nothing else. The mere fact that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 states that the Committee may organise entertainments, parties, social reunions, picnics etc. and innocent amusements and the expenses of such events shall be met by the Club. Persons who are not members, may also be invited if the Committee thinks fit. These two clauses only deal with the powers of the Committee. It is common to vest such powers with the Committee so that men of letters are made patrons of the Club merely to enhance the reputation and prestige of the Club. As for clause 39, it is not the case of Department that during the relevant year of account, the Club had organised such parties or amusements where non-members also took part. It is, therefore, not possible to interpret these two clauses as destroying the mutuality principle altogether. 18. It was then doubted whether the subscription paid by the members for the services rendered by the club cannot be taxed in view of the decisions of the Supreme Court in the case of CIT v. Calcutta Stock Exchange Association. Ltd. [1959] 36 ITR 222 and in the case of Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC). Under section 28(iii) of the Income-tax Act, 1961, income derived by a trade, professiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a trading association. A trade association may be an association of tradesmen to protect their common interest. The assessee, as found by the Tribunal in the statement of the case, is not such an association; nor is it a professional association. The said section, therefore, does not apply to the case of the assessee. The cases of Calcutta Stock Exchange Association and of the Delhi Stock Exchange Association are entirely different, as the said associations are not members' clubs. The receipts sought to be charged in both cases are referable to certain specific services, which are not privileges of membership." It is, therefore, not possible to countenance the proposition that the subscription paid by the members for the privileges and services enjoyed by them can be taxed under section 28(iii) of the Act. 19. The next question was whether in view of rule 7 of the memorandum of the Club, the principle of mutuality still prevails in view of the decision of the Gujarat High Court in the case of CIT v. Shree Jari Merchants Association [1977] 106 ITR 542. Rule 7 of Memorandum of Association of the Club is as under : "If upon the winding up or dissolution of the Club there remain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt accepted this contention. It will be noticed that the very object of the Club was to carry on the business of horse racing. It was not held by the Bombay High Court as a general proposition that the provision of facilities and amenities of the Club to the members or their families or guests would constitute business activity. The Supreme Court had already held in the case of the same assessee that the assessee was carrying on the business of horse racing and that of hotel-keepers, etc. The decision of the Bombay High Court thus rested on this basic finding. In the present case, it is not suggested or, behalf of the Department that the assessee is carrying on the business of providing facilities and amenities to the members. The decision of the Bombay High Court having been rendered on the basic finding that the assessee therein was carrying on a business, that decision is distinguishable and does not apply to the facts of the present case. 21. The other clarification sought was on the question of applicability of the judgment of the Supreme Court in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603 and in the case of Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790. These two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es not arise at all." Mr. Bajoria, the ld. counsel for the assessee sought to clarify the order of the W.B.T.T. It was submitted by him that the point was taken by the Tribunal suo motu and the assessee did not have an opportunity of clarifying the issue before the Tribunal. It was further pointed out by him that though he had cited the decisions of the Andhra Pradesh High Court in the case of Merchant Navy Club and the Calcutta High Court in Darjeeling Club Ltd.'s case, the Tribunal did not discuss these two decisions or advert to the principles laid down therein. Our attention was also drawn to paragraph 29 of the order, wherein the aforesaid decisions are referred to. The W.B.T.T. has held that in the matter of supply of refreshment, it cannot be held that the club had transacted only with its constituent members, and therefore the club was not a mutual association. The Tribunal has moreover held that the surplus in the catering establishment was also used for giving benefits of the rowing members, and therefore there was no mutuality. Adverting to these findings of the W.B.T.T., Mr Bajoria submitted that these findings are, contrary to the principles laid down by the jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain matters, there is no identity between the contributors to the funds and the participators of the fund or that the principle of mutuality has been destroyed. The Andhra Pradesh High Court, in the decision cited above has held that restricted participation by certain classes of members does not mean that there is no mutuality. It was further held by the Andhra Pradesh High Court that what is important is that there must be some contribution by the members towards the common fund and the members as a class must be entitled to participate in the surplus. At page 273 of the report, the High Court concluded as follows : "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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be paid or transferred directly or indirectly by way of dividend or bonus or otherwise howsoever by way of profit to the persons who at any time are to have been members of the Club or to any of them or to any person claiming through any of them, provided that nothing herein contained shall prevent the payment in good faith, of remuneration to any officers or servants of the Club or to any member thereof or other persons in return for any services actually rendered to the Club or the payment of interest on money borrowed from any member of the Club." Therefore, there is no justification for making a departure from the view held by the Tribunal in the assessment year 1984-85 regarding the taxability of the assessee's income. While on this aspect of the matter, we can usefully refer to the decision of the Madras High Court in the case of Presidency Club Ltd. v. CIT [1981] 127 ITR 264, where the High Court held that unless a members' club indulged in a trade or business with a profit-motive whether exclusively with its members or with non-members also, there can be no assessable income. It was held that the position of a club which does not carry on any commercial activity wou ..... X X X X Extracts X X X X X X X X Extracts X X X X
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