Per Shri K. A. Thanikkachalam, Judicial Member - These appeals are directed against the order of the AAC dated 6-12-1982 passed in IT Appeal Nos. 10/2 and 3 of the 1982-83 for the assessment years 1978-79 and 1979-80. Since the issues involved in these appeals are common, the appeals are taken up together and disposed of by a single order for the sake of convenience.
2. According to the facts of this case, the assessee filed its returns of income for both the years under consideration claiming that it entire income is exempt from tax. In the covering letter the assessee has stated that though it made income as per the income and expenditure statement for the years under consideration, since the club is established for the mutual benefit of the members, even though it derived income from non members it is not taxable. The assessee relied upon a decision of the Madras High Court in the case of Presidency Club Ltd. v. CIT  127 ITR 264. The ITO refused to accept the contention put forward by the assessee. According to the ITO, in this case, in all the previous years, that part of the income which is attributable to the services rendered to non-members was subjected to tax. The ITO was also of the view that in the case of a club which carries on business whether with members alone or with members and outsiders, the business activity which yields profit would be of a commercial nature and, therefore, there could no exemption merely because a club indulges in it. The assessee further contended that guests are brought by the members and the bills are paid by the member concerned. Therefore, according to the assessee, the club was not doing any business activity to an outsider with profit motive. But, however, the ITO was of the view that the assessee did not prove that there is no activity so far as the services rendered to the guests are concerned. The ITO also observed that even if receipts on account of members are exempt on the principle of mutuality, the same thing in his view will not hold good so far as guests are concerned. The ITO has also noted that the Tribunal in this very case considered the taxability of the receipts attributable to the guests in IT Appeal No.152 (Hyd.) of 1980 for the assessment year 1976-77 (order dated 11-2-1981) wherein the Tribunal directed the ITO to re-work the profit on the basis of 8 per cent of the gross profit as relating to income from business with outsiders. Inasmuch as the ITO was of the view that since the assessee has not brought any fresh material to warrant deviation from the above observation of the Tribunal, he considered that the abovesaid order of the Tribunal is binding on him.
Accordingly, the income of the club was brought to tax, in the light of the order of the Tribunal in IT Appeal No. 152 (Hyd.) of 1980 for the assessment year 1976-77 dated 11-2-1981.
3. On appeal, the AAC following the ratio of the decision of the Madras High Court in the case of Presidency Club Ltd. (supra), held that receipts attributable to services rendered to the non-members guests cannot be made subject to tax in view of the existence of the factor of mutuality among the members of the club.
4. Aggrieved, the assessee filed the present appeals before the Tribunal. The learned departmental representative contended that the AAC ought not to have directed the ITO to exclude the receipts attributable to services of non-members for the purpose of estimating income. It was further submitted that the AAC ought to have held that the receipts attributable to services rendered to non-members are taxable. The learned departmental representative also relied upon a decision of the Tribunal in the case of the same assessee for the assessment year 1976-77 and supported the order passed by the ITO for the taxability of the receipts attributable to the guests. The fact remains that the assessee is an AOP. It is a society registered under the Registration of Societies Act. The objects of the club are to promote social intercourse among the members of the club and their families and friends. The submission of the assessee was that since the club was established for the mutual benefit of the members, even though it derived income from non-members, it was not taxable. For all the previous years part of the income that was attributable to the services made to non-members was subjected to tax. This was evidenced from an earlier decision of the Tribunal in IT Appeal No. 542 (Hyd.) of 1980 for the assessment year 1976-77 dated 11-2-1981. The ITO relied upon this decision. The assessee placed reliance upon a decision of the Madras High Court in the case of Presidency Club Ltd. (supra). The ITO also placed reliance upon this decision in order to support his view that in the case of club, which carried on business whether with the members alone or with the members and outsiders, the business activity which yields profit would be of commercial nature and there could be exemption, merely because the club indulges in it. According to the ITO, it is not the same case as though the total expenditure of the club is apportioned amongst the members. Specific items were charged specifically and it partakes the character of business. According to the AAC, the Tribunal in its order dated 11-2-1981 in the case of the assessee for the assessment year 1976-77, did not hold that the ration laid down in the case of Presidency Club Ltd. (supra) was not applicable to the facts of this case nor was it held by the Tribunal on merits that the case did not support the stand of the assessee. In para 4 of the order of the Tribunal dated 11-2-1981 it was stated that - "He sought to place reliance on the decision of the Madras High Court in the case of the Presidency Club Ltd. v. CIT (127 ITR 264). The submission of the revenue was that as for this year was concerned, this contention had not been taken at any earlier stage. That being so and as it involves investigation of facts, we are unable to permit the assessee to raise this contention before us for this year." In furtherance of this, before the AAC the assessee submitted that nothing prevents the assessee to take up this plea for the years under consideration since each assessment has got to be decided separately.
Accordingly, it was submitted that since the club was established for the mutual benefit of members, even though it derived income from non-members, it was not taxable. Unless a trade with profit motive was indulged in by the club, whether exclusive with its members or with non-members also there could be no assessable income. In the case of a club which carries on business whether with members alone or with members and outsiders the business activity which yields profit would be of commercial nature and there could be no exemption merely because a club indulges in it. But the position of a club which does not carry on any commercial activity would be wholly different and the basic principle of mutuality that one cannot make any profit out of himself would apply on all non-commercial activities. One of the objects of becoming member of a club is to entertain the guests. In fact there is no privity of contract between the guests and the club and whatever services that are rendered to the guests are services rendered to the members and not to the guests. In this context, The Andhra Pradesh High Court in the case of CIT v. Merchant Navy Club  96 ITR 261 held that the supplies made by a club to its members for a price was not a sale for profit. Registration of the club as a society did not affect the nature of the transactions 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 member. The submission of the assessee in these appeals is that in respect of guests, the charges are to be borne by the members only and inasmuch as the guests are not the guests of the club, but the guests of the members and the members themselves borned the charges on account of the guests, there is no identity between the contributions to the club and the recipients of the benefits from the club. The cardinal requirement of mutuality is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must contribute to the common fund. In other words, there must be complete identity between the contributors and the participators. But it would have been a different thing if the club could have provided restaurant and bar services which would have been open to the outsiders and if the outsiders themselves had to bear the bills for such services, in such a case, it would partake the nature of business activity although it was a club with the object of mutuality. In the present case, the facts do not warrant such conclusion. The facts appearing in this case show that the assessee had not indulged in trade or business as such but was merely organising a social activity confined to its members. Therefore, any profit that arose was incidental to the activities which were mutual in nature.
5. The madras High Court had an occasion to deal with this subject whether a club run for the benefit of members, their families and their friends, provided accommodation to the members, family and friends and the rend received therefrom is exempt in Presidency Club Ltd.s case (supra). In that case, the Madras High Court held as under : "The whole concept of a members club is alien to profit-making. It is a sharing of common amenities in a spirit of camaraderie. The separate payment for some of the amenities is only a mode of contribution and does not bring its case within the vortex of taxation. The question whether even in a case of a members club, the profits arising from transactions with non-members could be subjected to tax, will have to be considered in the light of the decisions in Madras Race Club  105 ITR 433, Carlisle Silloth Golf Club v. Smith  6 TC 198 (CA) and National Association of Local Government Officers v. Watkins  18 TC 499 (KB). So long as the occupation of the room is referable to the amenity provided for the members for themselves no income can be said to be earned, so as to be brought to tax by the provisions of the IT Act. We have taken the same view in a sales tax case in State of Tamil Nadu v. Indian Officers Association  44 STC 264 (Mad.). In that case apart from the persons belonging to the families of the members occupying some rooms provided by the association, there was also provision of food for them. In other words, the amenities were in the shape of what could be found in a hostel. it was held that there was no sale to the inmates, as the organisation of a mess by the students themselves and dividing the expenditure among themselves was purely in the nature of mutual service and amenity. The same principle would apply here." (p. 272).
Inasmuch as the contention raised in present case, viz., that really no business was done and income attributable to facilities availed of by the non-members could not be brought to tax was not considered by the Tribunal in the earlier years as this ground was not raised in the initial stage, we are of the view that the department cannot place reliance upon the said decision of the Tribunal in IT Appeal No. 152 (Hyd.) of 1980. Accordingly, by respectfully following the abovesaid judgment of the Madras High Court in Presidency Club Ltd. (supra) which applies on all fours to the facts of the present case, we hold that the receipts attributable to services rendered to non-member guests cannot be subjected to tax in view of the existence of mutuality. In that view of the matter, we uphold the order passed by the AAC.