INCOME TAX OFFICER v. POONA CLUB LTD
[Citation -1984-LL-0312-8]

Citation 1984-LL-0312-8
Appellant Name INCOME TAX OFFICER
Respondent Name POONA CLUB LTD.
Court ITAT
Relevant Act Income-tax
Date of Order 12/03/1984
Assessment Year 1977-78, 1978-79
Judgment View Judgment
Keyword Tags principle of mutuality • general body meeting • revenue authorities • social intercourse • additional ground • interest earned • wealth-tax act • corporate body • memo of appeal • mutual benefit • profit motive • income liable • annual value • hire charges • social club • common fund • letting out • sales tax • take over • bad debt • premia
Bot Summary: A members' club is intended to promote s o c i a l intercourse among the members. 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. The assessment of income was confined to two sources the interest which was earned on its bank deposits, obviously on the ground that this income or surplus arose not as a result of transactions amongst the members between themselves, but by dealing with outside agencies, i.e., strangers or non-members, and income from property, namely, the suites in cottages let out on hire to members and their friends on the ground that this income arose to the club by virtue of its being owner of properties and not as a result of mutual dealings amongst the members. As for the latter category, i.e., income from property, the fact needs to be noted that the letting out of the suites was to the members of the club or their guests, but these guests were not entitled to this facility in their own right or capacity in any manner but only as members' guests; the booking and occupation of the rooms and suites was made in the name of the member who alone had the right to the facility in his capacity as member of the club; hire charges were also levied upon and realised from the members. Clause 6 of the original articles provided that there shall be four classes, i.e., founder member, patron, life member and permanent member and then enumerated who would be a permanent member. Clause 5 of the revised articles delineates the various classes of members more elaborately so as to include a founder member, patron, life member and permanent member, the last category excluding a subsidiary member which is then defined as constituted of a corporate member, a gymkhana subscriber, an honorary member, lady subscriber and a playing member. If we apply the test of mutuality, understood with reference to the surplus in the light of the foregoing discussion, to the facts of the assessee's case, it cannot be disputed that whatever surplus arose to the club from out of contributions made by all its members constituting its receipts, after defraying expenses, were entirely utilised for providing the benefits and amenities of the club which were without exception available to all the members.


There are two appeals filed in this case by department for years 1977-78 and 1978-79 with corresponding cross-objections by assessee and two appeals filed by assessee against orders of Commissioner under section 263 of Income-tax Act, 1961 ('the Act') for years 1979-80 and 1980-81. Since common points are involved in appeals and cross- objections, they are taken up together and will be disposed of, for sake of convenience, by this common order. 2. We would, at outset, deal with additional ground of appeal sought to be raised by learned departmental representative in appeals filed against order of Commissioner (Appeals) for first two years, which is in these terms: " Without prejudice to grounds raised earlier, Commissioner (Appeals) erred in holding that income of assessee is not chargeable on grounds of mutuality when in assessee's case there is no complete identity between contributors to fund and recipients of fund. " We find that in very first ground of appeal raised for two years, department raises contention that Commissioner (Appeals) erred in holding that principle of mutuality was applicable in assessee's case. additional ground sought to be raised on behalf of department in merely repetition of contention raised in memo of appeal and it is not, therefore, any additional ground. For these reasons, therefore, additional ground is rejected as infructuous. 3. dispute between department and assessee centres around question whether assessee is entitled to its claim for exemption on principle of mutuality. For all four years under consideration, assessee declared in its returns income from only one source and that is, interest earned on its deposits with banks. ITO held that assessee was also liable to be assessed under head 'Income from house property' on bona fide annual value of its properties consisting of cottage suites rented out to members and their guests. Against these assessments for years 1977-78 and 1978-79, assessee appealed to Commissioner (Appeals) who by her consolidated order for two years held, following ruling of Madras High Court in case of Presidency Club Ltd. v. CIT [1981] 127 ITR 264, that assessee's income from renting out aforesaid properties was saved on principle of mutuality. department is in appeal against Commissioner (Appeals)'s orders for two years and assessee has filed cross-objections thereto. For other two years, Commissioner took revision proceedings under section 263 against assessment orders holding that for reasons stated in his order, which is also consolidated for two years, principle of mutuality did not apply in assessee's case; on that finding he set aside assessment orders directing ITO to make fresh assessments on basis that principle of mutuality was not applicable. assessee is in appeal before us against this order of Commissioner. 4. Before proceeding to examine on facts of case whether principle of mutuality is applicable, it would be well for us to keep in view enunciation of principle as made by judicial authority. We could not do better for this purpose than to quote with respect enunciation of this principle as made by Madras High Court in case of CIT v. Madras Race Club [1976] 105 ITR 433 et seq. where question arose whether subscriptions collected by Madras Race Club from its members were exempt from tax on principle of mutuality. This is what their Lordships held: " In considering case for exemption of subscriptions collected from members of application on principle of mutuality it is necessary to bear in mind two concepts. first concept is that principle of mutuality is based on doctrine that no person can make profit out of himself. To take common instance, supposing dozen persons gather together and agree to purchase certain commodities in bulk and distribute them among themselves in accordance with their individual requirements, they may collect certain amount provisionally based on anticipated price of commodities to be purchased. If it ultimately happens that commodities are available at cheaper price so that at end of distribution of commodities among themselves, part of original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent savings and not income. Income-tax Act seeks to tax income and not savings... " not income. Income-tax Act seeks to tax income and not savings... " Then further: " second aspect relates to cases of absence of trade or business which produced profits. For instance, members' club is intended to promote s o c i l intercourse among members. It does not purchase or sell commodities. It is merely convenient instrument for purpose of providing facilities for members. There is no element of profit or concept of trade in such club. Unless statute itself intervenes and says that transaction between club and members shall be treated as sale as has been done by Tamil Nadu General Sales Tax Act, there will be no question of any trading between club and its members. Any surplus realised from members would not have character of income liable to be taxed. " 5. Bearing in mind meaning and scope of principle given by Madras High Court in aforesaid case, we may now proceed to examine whether, on facts, assessee's case falls within its scope. assessee, Poona Club Ltd., was incorporated as company under Indian Companies Act, 1913, on 31-8-1931. We would note here for sake of clarification that articles of association drawn up originally were revised by special resolution of general body meeting on 28-7-1979, but there was no change in memorandum. objects for which it was established were set out in clause 3 of memorandum of association. Those objects in main were to acquire and take over assets and liabilities of two unincorporated bodies known as Poona Gymkhana Club and Lloyd Polo Club, to promote sports such as Polo, Cricket, Tennis, Hockey, Football, Golf, Badminton, Billiards, Swimming, Squash, Athletics and other outdoor and indoor sports and games, entertainment and to encourage social intercourse between members to establish, maintain and conduct gymkhana club for accommodation of members and their friends and generally to afford to them all usual privileges, advantages, conveniences and accommodation of club and to enagage in and carry out activities and operations, including construction of club houses, pavilions, dwelling houses, bungalows and other conveniences for members, in furtherance of main objects. 6. All these objects quite evidently converged towards primary aim and purpose which was to run social club of members and for their mutual benefit, by providing usual forms and avenues of entertainment and amenities available in similar institutions. As much was accepted also by ITO as far back as in assessment for 1958-59, and his findings were confirmed in appeal that club although corporate body and registered under Companies Act, 1913, was essentially members' club and its dominant object was not to carry on any business but to provide certain amenities and conveniences to its members. assessment of income was confined to two sources (1) interest which was earned on its bank deposits, obviously on ground that this income or surplus arose not as result of transactions amongst members between themselves, but by dealing with outside agencies, i.e., strangers or non-members, and (2) income from property, namely, suites in cottages let out on hire to members and their friends on ground that this income arose to club by virtue of its being owner of properties and not as result of mutual dealings amongst members. 7. There is no dispute before us as regards assessment made in respect of former category, i.e., income derived from interest on assessee's bank deposits and securities; that income, therefore, is outside purview of subject-matter of appeals or cross-objections under consideration. As for latter category, i.e., income from property, fact needs to be noted that letting out of suites was to members of club or their guests, but these guests were not entitled to this facility in their own right or capacity in any manner but only as members' guests; booking and occupation of rooms and suites was made in name of member who alone had right to facility in his capacity as member of club; hire charges were also levied upon and realised from members. Again what was let out was not only bare rooms but furnished quarters with requisite toilet accessories such as running hot water, soap, etc., and room service. 8. We may now proceed to examine whether assessee's case is covered under principle of mutuality in either of two aspects of principle set out in ruling of Madras High Court in case of Madras Race Club. Commissioner in his order under section 263 drew adverse Race Club. Commissioner in his order under section 263 drew adverse conclusion keeping in view classic statement of this principle in case of Styles v. New York Life Insurance Co. [1889] 2 TC 460 (HL) that in order to satisfy requirements for application of this principle, it has to be shown that all contributors to common fund are also participators in surplus. Commissioner addressed himself to enquiry as to whether in assessee's case these conditions were satisfied and found that there was clause in articles of association of assessee-club which destroyed this essential identity of contributors, i.e., members of club, to common fund created through subscriptions and payments for various services and amenities and participators in surplus of that fund. offending clause, according to Commissioner, is clause 6 in original articles and clause 5 in revised version of articles. It would be convenient to set out here terms of these clauses: Clause 6 (Original Articles): " 6. No member other than permanent member of club shall be entitled to be elected member of committee of club or to attend or vote at any general meeting of club or be entitled to claim any assets of club upon its dissolution, but in all other respects every member shall be entitled (subject to any bye-laws for time being in force made by committee as hereinafter provided) to all rights and privileges and to be subject to all duties of member of club. " Clause 5 (Revised Articles) " 5. No person other than member of club shall be entitled to be elected as member of committee of club or to attend or vote at any general meeting of club or be entitled to claim any assets of club upon its dissolution and every member shall be entitled (subject to any bye-laws for time being in force made by committee as hereinafter provided) to all rights and privileges and to be subject to all duties of member of club. " 9. Analysing these clauses, Commissioner noted that there were different classes of members comprising membership of club and these were defined. Clause 6 of original articles provided that there shall be four classes, i.e., founder member, patron, life member and permanent member and then enumerated who would be permanent member. Clause 5 of revised articles delineates various classes of members more elaborately so as to include founder member, patron, life member and permanent member, last category excluding subsidiary member which is then defined as constituted of corporate member, gymkhana subscriber, honorary member, lady subscriber and playing member. According to Commissioner, this variation in definition of members did not overcome infirmity which, in his view, w s fatal to club's claim for mutuality, because one or more classes of members who, although they were contributors to common fund, were excluded from participating in surplus. This inference would necessarily follow, according to Commissioner, since both offending clauses deprive these classes to claim any assets, of club upon its dissolution. It is these words, it is contended on behalf of department, which must lead to interpretation that surplus of common fund was not distributable amongst all contributors to that fund, i.e., to all members of club. 10. We are, therefore, called upon to examine precise meaning and effect of these words in two clauses. In first instance, it does not appear to us entirely free of debate that right to claim any assets of club upon its dissolution being vested with any particular class or classes of members necessarily spells out scheme for distribution of surplus on such dissolution. assessee is company, admittedly, limited by guarantee. Its income or property, as correctly held by Commissioner (Appeals), was not distributable by way of dividend or profit amongst members, But quite apart from that, core question which we must ask ourselves is, precisely how is term 'surplus' to be understood as used in formulation of principle of mutuality set out in Style's case? What was this surplus in contemplation of their Lordships in that case? For finding answer, reference to facts of that case would be necessary and we would with great respect reproduce those facts from resume given in Madras Race Club's case. " ...In styles v. New York Life Insurance Co. [1889] 2 TC 460 (HL), company had no shareholders and no shares. It issued life policies of two kinds, participating and non-participating. In case of participating policies, policy-holders had voice in its administration and were entitled to share of its assets and liable to all losses and expenses incurred by company. non- participating policy-holders were merely creditors without any interest in its assets and without any liability for its debts. rate of premia paid for participating policies was different from or higher than that applicable to non- participating policies. In case of participating policies premia were not fixed, but fluctuating. calculation was made of probable disbursements of company on account of expenses and other liabilities and amount claimed as premia from policy-holders was adjusted in conformity with estimate. Then account was annually taken of transactions of that company, and excess of premia received from members over expenditure after carrying part to reserved fund, was repaid to them. question was whether surplus which was available with company in excess of its requirement in relation to participating policies was liable to be taxed even though it was actually returned later on to such policy-holders. House of Lords by majority held that so much of surplus was not profit that was taxable...... " 11. Thus, concept of surplus given to us in Styles' case, in distribution of which identity of contributors to common fund and participators must be found so as to invoke principle of mutuality, is that of excess of receipts over expenditure found when annual accounts of concern claiming to invoke it, are taken. That concept has nothing to do with surplus that might arise on dissolution of that concern. Following this concept, true test to our minds would appear to be to examine whether benefit of surplus is available as matter of right to all members of assessee-club, who had contributed to its funds, such surplus being excess of receipts over expenditure as found from annual accounts, and not hypothetical surplus, which may not even come into existence upon dissolution of club, if at all it were to be dissolved, on some unknown date in distant future. We find sanction for rationale of view which we are taking from ruling of Supreme Court in case of CWT v. Trustees of H.E.H. Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555. That case arose under Wealth-tax Act, 1957, and question before their Lordships was whether shares of beneficiaries could be held to be determinate and known. Their Lordships were pleased to approve of observations of Shelat, CJ., in case of Padmavati, Jaykrishna Trust v. CWT [1966] 61 ITR 66 (Guj.) quoting following passage from that judgment: " These decisions are clear authorities for proposition that in determining whether shares of beneficiaries are determinate and known, so that assessment should be made under sub-section (1) of section 41 of Income-tax Act, what revenue authorities have to see is whether such shares are known, and specific during accounting period. If these facts are known sub-section (1) and not first proviso would apply and it does not matter that number of beneficiaries might vary in future. Tax being leviable with reference to income of year of account, crucial fact is not what is general position but what is position during year of account. If during that year number of beneficiaries is known and specific and their shares in income are capable of determination, it would be sufficient and sub-section (1) of section 41 would apply and exceptions laid down in first proviso thereof would not apply. language used in sub-sections (1) and (4) of section 21 being similar to that in sub-section (1) of section 41 and first proviso thereof, there is no reason why same interpretation should not apply to provisions of sub-sections (1) and (4) of Wealth-tax Act. " (p. 575)--These decisions are- -Khan Bahadur M. Habibur Rahman v. CIT [1945] 13 ITR 189 (Pat.) and CWT v. Puthiya Ponmanichintakam Wakf [1967] 63 ITR 787 (Ker.). We draw guidance from this ruling for proposition, which is foundation for view we have taken, that tax being leviable with reference to income of year of account, crucial fact is not what is general position but what is position during year of account. 12. If we, therefore, apply test of mutuality, understood with reference to surplus in light of foregoing discussion, to facts of assessee's case, it cannot be disputed that whatever surplus arose to club from out of contributions made by all its members constituting its receipts, after defraying expenses, were entirely utilised for providing benefits and amenities of club which were without exception available to all members. It is nobody's case that this surplus was carried to some reserve fund to be accumulated or used in creating assets for distribution amongst any particular class of members on dissolution of club. Nor was right of participation in surplus which was available to all members destroyed, as department would have it, merely because there was possibility of deviation if hypothetical situation arose in some distant future. 13. We would now proceed to examine assessee's case on second aspect of principle of mutuality set down in Madras Race Club's case i,e., to determine whether there was any trading or profit motive in transactions between assessee-club and its members. On this aspect, we are clear in our minds that there was no trade or profit motive indulged in by assessee-club in these transactions. Commissioner (Appeals) was, in our view, entirely correct in applying ruling of Madras High Court in case of Presidency Club Ltd. so as to hold that club did not carry on any commercial activity and that it indulged in no trade or business as such but was merely organising social activities confined to its members. income which was sought to be assessed under head 'Income from house property' was, therefore, not liable to assessment. department has sought to rely on ruling of Allahabad High Court in case of CIT v. Wheeler Club Ltd. [1963] 49 ITR 52. That case has been dissented from in ruling of Madras High Court in Presidency Club Ltd.'s case on which we respectfully rely. That case has also been distinguished by Allahabad High Court in case of CIT v. Cawnpore Club Ltd. [1983] 14 TAXMAN 211. distinction made in that case, to effect that in Wheeler Club Ltd.'s case, Court did not have occasion to consider that income in question being property assessable under head 'Income from other sources', mutuality principle would become applicable to such income, equally applies in assessee's case. We would respectfully rely on latter Allahabad High Court's ruling in support of our conclusion. 14. We would now consider other authorities relied upon on behalf of department. Reliance is placed on ruling of Madhya Pradesh High Court in case of CIT v. Mathuralal Kapoorchand & Co. [1983] 141 ITR 297. In that case question was whether claim for bad debt could be allowed on In that case question was whether claim for bad debt could be allowed on ground, that debtor who owed debt to assessee had filed insolvency petition. It was held in that case that merely from statement of assets and liabilities filed by debtor in insolvency proceedings, it could not be determined whether debt was bad debt or to what extent it was bad debt. This case is called in aid to raise contention that in order to examine whether contributors to common fund were also participators, surplus to be taken into consideration could only be such surplus arising on dissolution of club. Apart from fact that, in our view, this case is not relevant at all, meaning sought to be given to term surplus by analogy with bad debt is erroneous. 15. next case relied upon is that of Bombay High Court in case o f Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT [1963] 48 ITR 507. question which arose in that case was, whether income from property was assessable in hands of trustees of Baronetcy trust. It was held in that case that since trustees were owners of property and liability for assessment of income from property arose from fact that assessee was owner of property, annual value of property was liable to be assessed in hands of trustees. No question arose in that case of claiming exemption on principle of mutuality. For same reasons, no assistance is available to department from rulings of Bombay High Court in cases of CIT v. Union Land & Building Society (P.) Ltd. [1972] 83 ITR 794 and CIT v. Zorostrian Building Society Ltd. [1976] 102 ITR 499. 16. For reasons discussed in foregoing paragraphs, we would uphold order of Commissioner (Appeals) for two years and dismiss t h e department's appeals for years 1977-78 and 1978-79. On same grounds, we set aside order of Commissioner under section 263 for subsequent two years and allow assessee's appeals for those two years. 17. [This para is not reproduced here as it involves minor issue.] *** INCOME TAX OFFICER v. POONA CLUB LTD.
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