TaxTMI 
TaxTMI 
1993 (8) TMI 112
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.... facts that the total receipts by way of subscription amounted to Rs. 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....
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....as preferred the present appeal before us. It may straightway be stated 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 ....
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....rough the earlier order of the Tribunal relied on by the ld. counsel for the assessee, 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....
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....m the above that introduction of the guests is a privilege of the members. It is 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 rul....
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....p; Such amount not less Rs. 125 than Rs. 18,000 and not more than Rs. 30,000 as may be fixed by the Committee from time to time. Non-Resident &nb....
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....r enter the first floor of the club-building unless he is introduced by an Ordinary member as his guest. However, Rowing members can play Badminton or Table Tennis for an additional fee. The Rowing members have to pay their subscription on half yearly basis. Under rule 73, all payments will be made by the Rowing member by coupons available on payment of cash from club. 10. There are similar Rules and Regulations for the Non-resident members as well as the Temporary members. 11. In the case of CIT v. Merchant Navy Club [1974] 96 ITR 261, the Andhra Pradesh High Court was considering the case of a Club which was registered under the Societies Registration Act. The assessee in that case was the Merchant Navy Club. There are three classes of members under the constitution of the Club. They were : (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 members of the gazetted marine staff of Visakhapatnam Port, and marine surveyors at Visakhapatnam Port; this class of members pay Rs. 15 o....
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....al. The class of members may diminish or may increase. Some members may retire, some members may die but the class of the members who contribute to the fund remain as a class the same. This aspect of the matter was emphasised by Lord Upjohn in the case of Faulconbridge (H.M. Inspector of Taxes) v. National Employers' Mutual General Insurance Association Ltd. [1952] 33 TC 103. at page 125; Finally, viewed in the light of the other cases, I think it is clear that when Lord Macmillan speaks of the cardinal requirement being complete identity between the contributors and the participators, he is not referring to individual identity but to identity as a class, so that at any given moment of time, the persons who are contributing must be identical with the persons who are entitled to participate; whereas it follows, in my judgment, that it matters not that the class has been diminished by persons going out of the scheme or that others may come in their place in the future. Therefore, it is not necessary that the members who contribute to the funds of the club must be the identical persons who enjoy the benefit of the excess contribution. What is important is that the members as a class w....
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....from the guests. This is made clear by clause 22(a) & (b) of the general bye-laws and rules of the Club. In fact, the CIT (A) in the impugned order has entered a categorical finding on a perusal of the register maintained by the Club. He was fully satisfied that no outsider is admitted to the premises of the Club except the guests. This categorical finding has not been challenged by the Department before us. 15. We may now refer to the judgment of the Supreme Court in the case of Royal Western India Turf Club Ltd. That decision is clearly distinguishable. In that case, the Club was not acting as an agent of the members for the purpose of providing facilities and supplies to the members only. The Club was acting as a business organisation and had dealings and transactions with the members as well as non-members. The Supreme Court emphasised this aspect of the matter at page 560 of the report. After referring to the famous Styles' New York Life Insurance Co. v. Styles (Surveyor of Taxes) [1889] 2 TC 460 and the principle of mutuality, the Supreme Court observed as under : "It is clear to us that those principles cannot apply to an incorporated company which carries on the busin....
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....concerned with the income of any trade or professional or similar association. A trade or professional association is an association of businessmen or professionals to protect their common interests. The assessee can neither be stated to be trade association nor a professional association. The assessee does not carry on any business and this fact is also not disputed. The assessee is purely a members' Club. In the case of Calcutta Stock Exchange Association Ltd. and in the case of Delhi Stock Exchange Association Ltd. the assesses were not members' Club, but they were trade associations. It was not suggested on behalf of the Department that the assessee was an association similar to a trade or professional association. Even if it is so suggested, that cannot be accepted because the word 'similar' in section 28(iii) has to be interpreted 'Ejusdem generis' with the word 'trade or professional'. A members' Club such as the present assessee is wholly different from a trade or professional association, and therefore there is no scope for roping the same into the provisions of section 28(iii). A similar contention was advanced on behalf of the Department before the Delhi High Court in th....
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....b." The view of the Gujarat High Court has not found favour with the Madras, Andhra Pradesh and Kerala High Courts. These High Courts have held that the test of mutuality does not require that contributors of the common fund should willy-nilly distribute the surplus amongs themselves. It has been held in these decisions that it is enough if the contributors to the fund have a right of disposal over the surplus and in exercise of that right they may agree that on winding up of the association or the Club, the surplus will be transferred to a similar association for use for some charitable objects (please see the following decisions) : 1. In CIT v. Madras Race Club [1976] 105 ITR 433 (Mad.) 2. In CIT v. West Godavari District Rice Millers Association [1984] 150 ITR 394 (A.P.) 3. In CIT v. Cochin Oil Merchants' Association [1987] 168 ITR 240 (Ker.). In view of this predominant judicial opinion, we have to follow the same and hold that the principle of mutuality is not destroyed, because of the provisions of rule 7 of the Memorandum of Articles of Association. 20. Another doubt which arose on which clarification was sought by us was whether the assessee-club will be c....
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....l. The fact of the present appeal depends only on the question whether the principle of mutuality is applicable on the facts of the case. These decisions are therefore, not relevant for deciding the present appeal. 22. The only other point that remains to be clarified is the applicability of the decision of the W.B.T.T. in Bengal Rowing Club's case. That decision was rendered in the assessee's own case. At paragraphs 36 and 37 of the order, the Tribunal held as under : "36. It appears from the constitution of the applicant-club that there is a class of members known as rowing members, who cannot take part or vote in any general meeting and do not have any right in the management of the club. They cannot be elected as members in the governing body. They are entitled to such of the other privileges of the ordinary members as may be prescribed by the rules and the bye-laws. They are governed by the special rules applicable to them. According to these rules, a rowing member is not permitted to introduce guests but, however, can bring his wife only inside the club premises. He can enjoy certain club facilities like playing badminton, table tennis free of charge and use the swimmin....
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....at the mere fact that the club had dealings with its rowing members did not lead to the conclusion that the principle of mutuality was destroyed, and therefore the income should be subjected to tax. In this connection, he drew our attention to various passages and observations in the aforesaid two decisions as supporting his contention that merely because there were different classes of members, the principle of mutuality was not destroyed. 23. We have gone through the order of the W.B.T.T. carefully. We agree with Mr. Bajoria that though the two decisions cited supra were cited by him before the W.B.T.T., the principles laid down in those two decisions have not been applied to the facts of the case. Normally, the order of the W.B.T.T. in the assessee's own case rejecting its contention, though not binding on us, would have persuasive value. However, if it is found that the principles laid down by the Jurisdictional High Court on the basic issues have not been kept in view or adverted to by that Tribunal, it would be open to us to hesitate to follow the order of the W.B.T.T. and take our own view on the facts of the present case applying the principles laid down by the Jurisdict....
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....ether the surplus is paid back to 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 ....