2000 (3) TMI 4 - SC - Income Tax

Section 22 taxes income, not property; mutuality exempts club receipts and deemed property income from tax

The SC allowed the appeals, set aside the impugned judgment and held that tax under section 22 is on income and not on the property itself; the tribunal's ... Annual letting value of the club building - under the head 'Income from property' Or not not exigible to income-tax - provides recreational and refreshment facilities exclusively to its members and their guests - Application of doctrine of mutuality - Whether under section 22 of the Act, tax levied is on income from property concerned or on the property itself ? - HELD THAT:- The argument of the Revenue that the tax under section 22 is being levied not on the income from the property but on the property is on the basis of the judgement of the Allahabad High Court in Wheeler Club's case [1962 (9) TMI 55 - ALLAHABAD HIGH COURT] - It is to be noticed that this judgement was delivered under the provisions of the Indian Income-tax Act, 1922, and section 9 of that Act is similar to section 22 of the present Act. A perusal of the above judgement shows that the High Court in that case proceeded on the basis that the liability to pay income-tax under section 9 arises from the mere fact of the assessee owning the property having an annual letting value and not from his deriving any income from it. It also held that the principle of mutuality does not apply to such measure of taxation. We find it difficult to agree with the High Court on this point. In our opinion, the High Court erred in coming to the conclusion that the tax levied under section 9 of the Act (section 22 of the new Act) is a tax on property, for more than one reason. Thus, be it the 1922 Act or the 1961 Act, the same does not permit the levy of tax on anything other than the 'income'. Thus, we are of the view that the business of the appellant is governed by the principle of mutuality even the deemed income from its property is governed by the said principle of mutuality. Therefore, these appeals have to succeed. Accordingly the appeals are allowed and the judgement impugned herein is set aside. Issues Involved:1. Whether the annual letting value of the club building is assessable to income-tax under the head 'Income from property'.2. Whether the principle of mutuality applies to the property income, making it non-taxable.Detailed Analysis:1. Assessability of Annual Letting Value under 'Income from Property':The Tribunal questioned if the annual letting value of the club building should be taxed under 'Income from property'. The High Court, relying on section 22 of the Income-tax Act, 1961, and precedents set by the Allahabad High Court in CIT v. Wheeler Club Ltd. and Delhi High Court in CIT v. Delhi Gymkhana Club Ltd., answered this in the negative, favoring the Department. The appellant argued that its income is governed by the principle of mutuality and thus falls outside the scope of taxable income under the Act. The appellant cited the Supreme Court's decision in CIT v. Bankipur Club Ltd. and Bhagwan Dass Jain v. Union of India to support this claim.The Revenue contended that the principle of mutuality does not apply as there is no identity between contributors and participators, referencing CIT v. Royal Western India Turf Club Ltd. They argued that section 22 imposes a tax on property, not income, supported by the Allahabad High Court's judgment in Wheeler Club Ltd.The Supreme Court disagreed with the High Court's interpretation, clarifying that section 22 taxes income from property, not the property itself. The Court emphasized that under both the 1922 and 1961 Acts, only income can be taxed. This view aligns with the legislative competence under entry 82 of List I of Schedule VII to the Constitution, which allows taxation only on income. The Court referenced its decision in Bhagwan Dass Jain, affirming that section 22 taxes income, not property. Consequently, the Allahabad High Court's judgment in Wheeler Club Ltd. was deemed incorrect.2. Application of the Principle of Mutuality:The appellant argued that its business operates on the principle of mutuality, where members pay for their own expenses, and any surplus is used for club maintenance and development. The appellant's business does not involve outsiders, maintaining a clear identity between contributors and recipients, unlike in Royal Western India Turf Club Ltd., where outsiders participated.The Court noted that section 2(24) of the Act recognizes mutuality, excluding such businesses from tax except those specified in clause (vii). The appellant's business did not fall under this clause. The Court cited Royal Western India Turf Club Ltd., which excluded businesses involving mutuality from tax. The Court also referenced CIT v. Bankipur Club Ltd., which upheld that mutual activities do not generate taxable profits.Applying the criteria from English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commr. of Agrl. I. T., the Court found that the appellant's business met the conditions for mutuality: identity of contributors and recipients, the entity acting as an instrument for members, and no profit derived from contributions.The Court further referenced its decision in CIT v. Bankipur Club Ltd., affirming that mutual activities, including the annual value of clubhouses, are not taxable. This contradicted the High Court's reliance on CIT v. Delhi Gymkhana Club Ltd., which hypothesized that income from house property might be taxable despite mutuality.Conclusion:The Supreme Court concluded that the appellant's business is governed by mutuality, excluding even deemed income from tax. The appeals were allowed, setting aside the High Court's judgment. The Tribunal's questions were answered affirmatively in favor of the appellant, with each party bearing its own costs.