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Commissioner of Income-tax Vs. Merchant Navy Club - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 9 of 1969
Judge
Reported in[1974]96ITR261(AP)
ActsIncome Tax Act, 1922 - Sections 10, 10(6) and 12; Societies Registration Act; Sale Tax Act
AppellantCommissioner of Income-tax
RespondentMerchant Navy Club
Appellant AdvocateP. Rama Rao, Adv.
Respondent AdvocateJ.V. Srinivasa Rao and ;M.J. Swamy, Advs.
Excerpt:
direct taxation - exemption - sections 10, 10 (6) and 12 of income tax act, 1922, societies registration act and sales tax act - whether assessee-club was entitled to exemption from income-tax in respect of its income for assessment year 1961-62 - assessee contended that club had not been formed for purpose of making profits by trading - surplus of receipts over expenditure derived by assessee-club does no go to any person in capacity other than as contributor or consumer - assessee-club was not a trade association nor is excess a profit taxable as income from other sources - held, income not taxable either under section 10 of act of business income or under section 12 of act as income from other sources. - - 3. in pursuance of one of its objects to provide recreation for the.....sriramulu, j.1. this reference arises under the indian income-tax act, 1922. at the instance of the commissioner of income-tax, andhra pradesh, the income-tax appellate tribunal, hyderabad bench, has referred the following question for the opinion of this court :'whether, on the facts and circumstances of the case, the assessee-club is entitled to exemption from income-tax in respect of its income for the assessment year 1961-62 '2. the material facts leading to the reference may be stated. the assessee is the merchant navy club, visakhapatnam. by subscribing their names to a memorandum of association filed with the registrar of joint stock companies under the societies registration act, 1860, some persons formed themselves into a society and got it registered under section 3 ofthe.....
Judgment:

Sriramulu, J.

1. This reference arises under the Indian Income-tax Act, 1922. At the instance of the Commissioner of Income-tax, Andhra Pradesh, the Income-tax Appellate Tribunal, Hyderabad Bench, has referred the following question for the opinion of this court :

'Whether, on the facts and circumstances of the case, the assessee-club is entitled to exemption from income-tax in respect of its income for the assessment year 1961-62 '

2. The material facts leading to the reference may be stated. The assessee is the Merchant Navy Club, Visakhapatnam. By subscribing their names to a memorandum of association filed with the Registrar of Joint Stock Companies under the Societies Registration Act, 1860, some persons formed themselves into a society and got it registered under Section 3 ofthe Societies Registration Act; One of the objects of the assessee-club was to provide recreation for the officers and ratings of vessels of the merchant navies of the world. Three classes of members are contemplated under the constitution of the club. They are : (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 or Rs. 10 as annual subscription; and (3) such persons as having close connection with the sea borne trade of Visakhapatnam, who in the opinion of the committee justify their being accepted as members and likewise such officers of the Indian Navy as shall on application be approved by the committee; this class of members pay no subscription at all and shall have no voting rights. The committee has also power to invite the companies of visiting warships of any nationality to be special honorary members. This class of members also do not pay any subscription.

3. In pursuance of one of its objects to provide recreation for the officers and ratings of vessels, the club provided certain amenities like restaurant and bar, etc. Those amenities were provided to the members only on payment of their cost plus some extra amount. The extra amount so realised was utilised by the club for the maintenance and improvement of the club. Those amenities were provided to both the paying and non-paying members but only on payment. The amenities were provided only to the members of the club and not to outsiders.

4. For the assessment year 1961-62 after meeting all the expenditure, the club realised a surplus of Rs. 35,301. Before the Income-tax Officer the assessee contended that, (i) under the Sales Tax Act, the Sales Tax Appellate Tribunal had decided that the assessee club was not a dealer and the surplus realised by it was not its profit; (ii) the club is a mutual benefit society and hence the surplus realised by it was not liable to income-tax under the Income-tax Act.

5. The Income-tax Officer found that the subscribing members were not entitled to the facilities, the sales and service rendered were purely for profit, these profits were utilised for improvement of the club and for developing other facilities, the customers to the club who contributed nothing to the same were entitled to participate in the surplus and there was no element of a social club present because even the games were charged. The Income-tax Officer was also of the view that the definition of the word 'dealer' under the Sales Tax Act was irrelevant so far as the Income-tax Act was concerned and the trading was between payingmembers and non-paying members and was not a trading by self with self. In that view the Income-tax Officer held that the surplus was taxable in law and accordingly taxed it. In arriving at the said conclusion, the Income-tax Officer relied upon Section 10(6) of the Income-tax Act and also upon the absence of mutuality between the contributors and the participators.

6. Aggrieved by the order of the Income-tax Officer the assessee filed first appeal to the Appellate Assistant Commissioner. It was contended before the Appellate Assistant Commissioner that the assessee was a mutual benefit society inasmuch as even such members who did not pay any subscription had to pay for the amenities which they enjoyed and, therefore, there was identity as a class between the participators and the contributors. The Appellate Assistant Commissioner accepted the said contention of the assessee and held that the surplus of receipts over expenditure was exempt from payment of tax.

7. Aggrieved by the order of the Appellate Assistant Commissioner, the Income-tax Officer went up in appeal to the Income-tax Appellate Tribunal. Before the Tribunal it was contended that, (i) the members who enjoyed the amenities were not only indeterminate but also did not pay any subscription ; (ii) the club was a trade association within the meaning of Section 10(6) of the Act; and (iii) there was no mutuality between the contributors and the participators. The Tribunal rejected those contentions and held that the members of the club, at any given point of time, were well defined. The fact that some members did not pay any subscription did not detract from the genuineness of their membership. The amenities were provided by the club only to the members of the club and the income derived was only from the members of the club. The assessee was not a trade association but a social club inasmuch as all the members, whether they paid any subscription or not, paid for the amenities they enjoyed. There was a complete identity between the contributors to the common fund and the participators in the surplus. Relying upon the decision of the Supreme Court in Commissioner of Income-tax v. Kumbakonam Mutual Benefit Fund Ltd., : [1964]53ITR241(SC) and of the Lahore High Court in United Service Club v. Crown, A.I.R. 1921 Lah. 208 the Tribunal agreed with the view of law expressed by the Appellate Assistant Commissioner and dismissed the departmental appeal.

8. Hence the above question has been referred to this court under Section 66(1) of the Indian Income-tax Act, 1922, at the instance of the Commissioner of Income-tax, Andhra Pradesh.The learned counsel, Sri P. Rama Rao, appearing for the Commissionerof Income-tax contended that the essence of mutuality is that both the rightto contribute to the common fund and the right to participate in the surplus must be available to an identical body and it is necessary that every member should contribute to the common fund before he could be allowed or permitted to participate in the surplus. In the assessee-club, there are members who do not pay any subscription to the club. Such members cannot be said to contribute to the common fund of the club. They are not genuine members. Since one section of the members does not contribute anything to the common fund but participated in the amenities provided by the club, there is no identity between the contributors to the common fund and the participators in the surplus. The essential requisite of mutuality is, therefore, absent in this case. The assessee-club is a society which has been registered under the Societies Registration Act. It is a non-proprietary club. The assets of the club do not belong to the members of the society, nor when the society is dissolved, do they get back the assets of the club. Therefore, even the members who contribute to the common fund do not participate in the benefits of it. The registered club being distinct and separate from its members sells the amenities, beverages or refreshments to its members. Supply by the registered club as a unit to its members constituted a sale and the amount in excess of the cost of the refreshments, beverages, etc., received by the club from its members, is profit arising out of the sales which is taxable in law. The club is, therefore, like a trading association, trading with its members. In determining whether a particular receipt is taxable or not, the court cannot ignore the transaction which is the source of the receipt and proceed on what they regard as substance of the matter. In support of the above argument the learned counsel relied upon the decisions in Commissioner of Income-tax v. Kumbakonam Mutual Benefit Fund Ltd., : [1964]53ITR241(SC) , Joint Commercial Tax Officer v. Young Men's Indian Accociation, : [1970]3SCR680 , Commissioner of Income-tax v. B.M. Kharwar, [1969] 73 I.T.R. 603 (S.C.) and Pamulapati Buchi Naidu College Committee v. Government of Andhra Pradesh, A.I.R. 1958 A.P. 773.

9. Sri M.J. Swamy, the learned counsel appearing for the assessee, contended that the stand taken by the department before the income-tax authorities and the Tribunal was that there was a sale by the paying members to the non-paying members. The department cannot be permitted now to change its stand that the sale is by the society as an entity to its members. When the constitution of the club permits the admission of two kinds of members paying and non-paying it cannot be said that the non-paying members are not genuine members. Neither the income-tax authorities nor the Tribunal has given a finding that the non-paying members are not genuine members. It cannot now be contended on behalf of the revenue that non-paying members are not genuine members. It is incorrect to say that honorary members do not contribute anything to the common fund. The honorary and non-paying members also do pay to the common fund by way of payment of something extra over the cost of amenities they receive from the club. It does not make any difference whether the surplus is paid to the members or carried to a reserve for application to the improvement of the club and for providing better facilities for the members. Although the club is a registered society, still the property belongs to the members of the club and the club is only a convenient agent through which the supplies are made or services are rendered by the members to the members. The essence of mutuality is only to find out whether the club trades with an outside body. The club provides amenities or renders services only to the members and that too on payment of prices. In such a case the club effects no sales. The club or its paying members do not effect a sale or transfer any property to the paying or non-paying members. Hence, the surplus is not a profit which is taxable in law. It is not a trade association either. The profit motive is absolutely absent. Hence, no portion of the surplus is taxable either as business profit or as income from other sources. In support of the above argument the learned counsel relied upon the following cases. United Service Club v. Crown, A.I.R. 1921 Lah. 208, Commissioners of Inland Revenue v. Eccentric Club Ltd., [1923] 12 T.C. 657, 669 (C.A.), Faulconbridge (H.M. Inspector of Taxes) v. National Employers Mutual General Insurance Association Ltd., [1952] 33 T.C. 103 and Secunderabad Club v. Commissioner of Sales Tax, [1957] 8 S.T.C. 850 (A.P.). The learned counsel also invited our attention to the state of law regarding mutual society expressed in Gunn's Commonwealth Income Tax Law and Practice and G. S. A. Wheatcroft's Law of Income Tax, Surtax and Profits Tax. The Income-tax Act levies tax on income or profit. Before assessable profits can arise from a business there must be two parties to the transaction, the person who makes the profit and the person from whom the profit is made. Where those two parties are identical, that is one and the same, no assessable profits can arise. If instead of one, more persons than one have combined for the purpose of supplying themselves with goods or services and any surplus arising from such transactions is returnable to those persons in their character of purchasers or consumers, the surplus is not assessable. In paragraph 79, at page 36, in Gunn's Commonwealth Income Tax Law and Practice, the law as prevailing in the Commonwealth is succinctly stated thus:

'So long as the ownership of the surplus is restricted to those who provided it as a class it is not assessable, and it is immaterial that it is not immediately distributed to its members, but is held in reserve, or that itis not distributed in precisely the proportions in which the members contributed to the surplus.

Where the parties are not identical, or the surplus is distributed among persons other than in their character of persons subscribing the surplus, i.e., as shareholders receiving a dividend or as debenture-holders deriving interest, the profit is assessable.'

10. Tracing the origin and the development of law in this behalf, Wheat-croft in his book on the Law of Income Tax, Surtax and Profits Tax, in paragraph 1-417 at pages 1200 and 1201 stated thus :

'In several early cases there were dicta to the effect that a man could not make a profit by trading with himself; this developed into the proposition that when persons contribute to a common fund in pursuance of a scheme for their mutual benefit having no dealings or relations with any outside body, they cannot be said to have made a profit when they find they have overcharged themselves and that some portion of their contributions may be safely refunded.'

11. The learned author, after deducing the principles in the decided cases, stated the law thus :

'It has also been established that the same principle applies although the contributors incorporate themselves into a separate entity to carry out the mutual scheme and the surplus contributions are put to reserve and not immediately returned. For this doctrine to apply it is essential that all the contributors to the common fund are entitled to participate in the surplus and that all the participators in the surplus are contributors, so that there is complete identity between contributors and participators. This means identity as a class, so that at any given moment of time the persons who are contributing are identical with the persons entitled to participate; it does not matter that the class may be diminished by persons going out of the scheme or increased by others coming in.'

12. The constitution of the club provides for admission of two kinds of members, (i) the paying members, and (ii) non-paying members. When the constitution of the club provides for admission of non-paying members, it is futile to argue that non-paying members are not genuine members. It was never urged before the income-tax authorities by the revenue that the non-paying members were not genuine members, nor have those authorities given any finding that non-paying members are not genuine members. The Tribunal, on the other hand, have given a finding that they are genuine members. We, therefore, hold that the revenue cannot be permitted to raise at this stage that non-paying members are not genuine members. The finding that the non-paying members are genuine is binding. We also hold that there is no substance in that contention. Although before the income-tax authorities and the Tribunal the department hadtaken the stand that the sale of the refreshments, beverages, etc., are services rendered by the paying members to the non-paying members, still there is nothing in law which prevents the revenue from contending that the sales are by the society as an entity to its members. No fresh facts are needed for raising such a plea. It is only on the admitted fact or facts found by the Tribunal such a plea has been raised. Therefore, the revenue is competent and entitled to raise such a plea on facts which are on record. The paying members contribute to the common fund of the club by paying subscriptions. They also contribute to the club by paying something extra over the cost for the amenities they receive from the club. Similarly, the non-paying members also contribute to the club by paying something extra over the prices of those amenities provided 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.

13. It is an admitted fact that the supplies of the refreshments, beverages, etc., are made and services rendered by the club only to its members and not to any outside body and that those amenities are provided or services rendered to the members only on payment.

14. The cardinal requirement for mutuality has been laid down by Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills, [1932] 16 T.C. 430, 448 (H.L.) thus:

' ......all the contributors to the common fund must be entitled toparticipate in the surplus and that all the participators in the surplus must be contributors to the common fund ; in other words, there must be complete identity between the contributors and the participators.'

15. After a review of the English and Indian cases bearing on the pointtheir Lordships of the Supreme Court in Commissioner of Income-tax v. Royal Western India Turf Club Ltd., : [1953]24ITR551(SC) laid down the principle of mutuality thus :

'Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its ownmembers.'

16. In Thomas v. Richard Evans and Co., [1926] 11 T.C. 790 (K.B.). we find the following observations at page 823 of that report:

'Where all that a company 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 policy-holders--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, [1889] 2 T.C. 460 (H.L) 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. That, as I understand it, is the effect of the decision in the New York case.'

17. The question of taxability of the surplus received by a mutual benefit society came up for decision before the Supreme Court in Commissioner of Income-tax v. Kumbakonam Mutual Benefit Fund Ltd., : [1964]53ITR241(SC) . The facts of that case are as follows :

18. Kumbakonam Mutual Benefit Fund Ltd., being incorporated under the Companies Act, was a company, limited by shares. It carries on banking business restricted to its shareholders. The shareholders are entitled to participate in the various recurring deposit schemes of the assessee or to obtain loans on security. Recurring deposits are obtained from members for fixed amounts to be contributed monthly by them for a fixed number of months as stipulated at the end of which a fixed amount is returned to them according to published tables. The amounts so returned will cover the compound interest of the period. These recurring deposits constitute the main source of funds of the assessee for advancing loans. Such loans are restricted only to members, who have, however, to offer substantial security therefor, by way of either the paid up value of their recurring deposits, if any, or immovable properties within the Tanjore district. Out of the interest realised by the assessee on the loans, which constitutes its main income, interest on the recurring deposits aforesaid are paid as also all the other outgoings and expenses of management and the balance is dividend among the members pro rata according to their shareholdings after making provision for reserves, etc., as required by the memorandum of articles aforesaid. The shareholders who are thus entitled to participate in the profits need not have either taken loans or have made recurring deposits.

19. The Income-tax Officer assessed the entire surplus to tax. Taxability of the surplus was upheld by the Appellate Assistant Commissioner on first appeal and by the Income-tax Appellate Tribunal on second appeal.

20. On a reference, the High Court held that what is accordingly required is that both the right to contribute and the right to participate must be available to an identical body and it was not necessary that every member should contribute before he can be allowed to participate and that condition was satisfied in the assessee's case. The High Court accordingly reversed the decision of the Tribunal. On appeal, the Supreme Court held that : [1964]53ITR241(SC) :

'It seems to us that it is difficult to hold that Styles' case, [1889] 2 T.C. 460 (H.L.). applies to the facts of the case. A shareholder in the assessee-company is entitled to participate in the profits without contributing to the funds of the company by taking loans. He is entitled to receive his dividend as long as he holds a share. He has not to fullfil any other condition. His position is in no way different from a shareholder in a banking company, limited by shares. Indeed, the position of the assessee is no different from an ordinary bank except that it lends money to and receives deposits from its shareholders. This does not by itself make its income any the less income from business within Section 10 of the Indian Income-tax Act.'

21. Their Lordships of the Supreme Court observed in the body of their judgment that where there is a separate entity or where there is a company, the test is that one has to look at the subscribers and at the participants and see if they are the same. The property was not the property of the assessee : it was the property of the members themselves. It is that feature which Chagla C.J. failed to notice in Ismalia Grain Merchants Association v. Commissioner of Income-tax, [1957] 311.T.R. 433 (Bom.).

22. We will next proceed to consider the cases cited by the learned counsel appearing for the assessee. In United Service Club v. Crown, A.T.R. 1921 Lah. 208, 210 Martineau J. of the Lahore High Court observed thus:

'I see no essential distinction between the case of such an association and that of a club whose members subscribe for their mutual benefit, and I do not think that the money received by a club from the members composing it can be properly regarded as 'income', a word which itself seems to imply something received from outside.'

23. In Commissioners of Inland Revenue v. Eccentric Club Ltd., [1923] 12 T.C. 657, 696 (C.A.) the facts were that the assessee, the Eccentric Club Ltd., was a company incorporated under the Companies Act. It was promoted for social intercourse amongst gentlemen connected with literature, art, music, drama, etc., and to buy,prepare, supply, sell and deal in all kinds of provisions and refreshments required or used by the members of the club or others frequenting the club. Every member of the company undertakes to contribute to the assets of the company in the event of its being wound up. The income and property of the club shall be applied towards the promotion of the objects of the club and no member of the club in his character as member shall be entitled to receive, directly or indirectly, any dividend, bonus or other profit out of the income or property of the club. The property of the club on its winding up would be applied in accordance with the company's articles of association. The profits of the club were solely applied towards the benefit of the club or otherwise in the promotion of the objects of the club. No portion of the property of the club left over after payment of debts shall be paid and distributed among the members of the club. There were no receipts from anything in the nature of trade from persons other than members. Warrington L.J., in deciding the case, observed thus:

'The club proprietor, whether an individual or a company, carries on a business with a view to profit as an ordinary commercial concern. This the present company certainly does not do. I think the proper mode of regarding the company in the present case 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 transactions of sale and purchase being merely incidental to the attainment of the main object. What is in fact being carried on, putting technicalities aside, is a member's club and not a proprietary club, nor any undertaking of a similar character. That in such a case one may go behind technicalities and look at the substance is I think shown by the mode in which the House of Lords dealt with a question similar in this respect, in Styles v. New York Life Insurance Company, [1889] 2 T.C. 460 (H.L.). That transactions of sale and purchase may be merely incidental to non-commercial objects and not regarded as in themselves a trade is in my opinion shown by the contrast recognised by the courts in Religious Tract Society of Scotland's case, [1896] 3 T.C. 415 (C. Exch.) between the bookselling business which was held to be a trade, and the colportage which was held not to be of that character.'

24. In Faulconbridge (H.M. Inspector of Taxes) v. National Employers' Mutual General Insurance Association Ltd., [1932] 33 T.C. 103, 123 Upjohn J. observed that:

'If members instead of receiving back part of their surplus contributions by way of bonus, prefer to leave them with the association to attract more members to come in, or to provide additional reserves to cover additional classes of insurance, I do not see how that alters the character of the surplus, nor why the principle of mutuality is thereby affected.'

25. In Pamulapati Buchi Naidu College Committee v. Government of Andhra Pradesh, A.I.R. 1958 A.P. 773 Satyanarayana Raju J., dealing with the status of a registered society observed thus:

'By reason of the provisions of the Societies Registration Act, 1860, once the society is registered with the Registrar, by the filing of the memorandum and certified copy of the rules and regulations and the Registrar has certified that the society is registered under the Act, it enjoys the status of a legal entity apart from the members constituting the same and is capable of suing or being sued. But the members of the society or the members of the governing body do not have any proprietary or beneficial interest in the property the society holds. It follows that upon its dissolution, they cannot claim any interest in the property of the dissolved society. The Societies Registration Act, therefore, does not create in the members of the registered society any interest other than that of bare trustees. What all the members are entitled to do is the right of management of the properties of the society subject to certain conditions.'

26. In the following two cases it has been held that, supply of refreshments, drinks, etc., by a social and recreational club to its members which is not conducted for profit or gain cannot be regarded as a sale by a dealer.

27. In Joint Commercial Tax Officer v. Young Men's Indian Association, : [1970]3SCR680 the Supreme Court observed thus :

'If the club even though a distinct legal entity is only acting as an agent for its members in the matter of supply of various preparations to them no sale would be involved as the element of transfer would be completely absent.'

28. Shah J. (as he then was), in his separate judgment, also observed that:

'Where, however, the club is merely acting on behalf of the members to make available to them refreshments, beverages and other articles, the transaction will not be regarded as a sale, for the club is the agency through which the members have arranged that the refreshments, beverages and other articles should be made available. The test in each case is whether the club transfers property belonging to it for a price or the club acts as an agent for making available property belonging to its members.'

29. In Secunderdbad Club v. Commissioner of Sales Tax, [1957] 8 S.T.C. 850, 854 (A.P.) Satyanarayana Raju J. held that:

'On a consideration of the constitution of the petitioner club, I am satisfied that there is no taint of commerciality in the supply of goods toits members and also that there is no profit motive. The Secunderabad Club is undoubtedly a members' club and not a proprietary club and the decision in Cosmopolitan Club case, [1935] 6 S.T.C. 1 (Mad.) clearly applies to the petitioner club.'

30. On a perusal of the objects of the assessee-club, it is manifest that the club has not been formed for the purpose of earning profit or for the purpose of trading with its members and making a profit. The supplies made by the club to its members are not tainted with commerciality. Therefore, the supplies made by the assessee-club to its members cannot be considered as sales by the club to its members. There is no element of transfer in the supplies made by the club to its members. Therefore, the element of taxable profit is lacking in this case. As we have already stated above both the paying members and the non-paying members contribute to the common fund. The paying members may contribute to the common fund by paying their subscriptions. The non-paying members also contribute to the common fund by paying something extra over the cost of the amenities supplied to them. Therefore, both the paying and non-paying members contribute to the common fund.

31. From the aforesaid discussion the principles of mutuality that emerge from the decided cases may be stated thus:

32. 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 ident'ical body. That does riot mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether 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 its surplus taxable in law when it over-charges its members for the supply of refreshments, beverages or amenities to its members. Such supplies are not sales as there is no element of transfer of property in them.

33. The assessee club has been registered as a society under the Societies Registration Act and has a distinct and separate status for itself. Supplies made by it to its members for a price is not a sale for profit. Registration of the club as a society does not affect the nature of the transaction or the taxability of the surplus. The club in all such cases is only acting as an agent of the members for making supplies to the members. The property belongs to the members and the club conveniently acts as the agent of the members in supplying the beverages or refreshments, etc., on behalf of the members to the members who demand them. In coming to the above conclusion we are not ignoring the legal form or character of the supplies. In fact, the property, although in law belongs to the club, for all practical purposes is the property of the members of the club. The facts of the case, therefore, clearly bring this case under the principle laid down in Styles' case, [1889] 2 T.C. 460 (H.L.). No sales are effected by the club and as such there is no trade for profit. We, therefore, hold that the surplus received by the club is not a profit from business assessable under Section 10 of the Indian Income-tax Act, 1922.

34. Since the club has not been formed for the purpose of making profits by trading, it is not a trade association. The surplus of receipts over expenditure derived by the assessee-club does not go to any person in the capacity other than as contributor or consumer. Therefore, the assessee club is not a trade association nor is the excess a profit taxable as income from other sources. We, therefore, answer the reference in the following manner:

35. Surplus received by the assessee-club is not income. It is therefore, not taxable either under Section 10 as business income or under Section 12 as income from other sources. The reference is answered accordingly. The department shall pay the costs to the assessee. Advocate's fee Rs. 250.


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