Per Shri K. T. Thakore, Accountant Member - This appeal which is filed by the assessee relates to the assessment year 1977-78. The assessee is a club which has been incorporated on 14-12-1973 as a company limited by guarantee. The object of the club is to promote sports activities and to function as a social club. It also carries on business as proprietors of the club, viz., in regard to amusement, catering, etc.
It follows calendar year as its previous year. The income and expenditure account of the club showed an excess of expenditure over income at Rs. 2,99,973. The said account on the receipt side, inter alia, included interest from bank amounting to Rs. 30,277 and the miscellaneous income of Rs. 1,225. The ITO was of the view that the income from subscription, guest fees, etc., was not exigible to tax on the ground of mutuality. On parity of reasoning he held that the deficit in the account insofar as it related to excess of expenditure over receipts from aforesaid sources was not allowable against income from interest and miscellaneous income. He therefore, brought to tax income from interest from bank and miscellaneous income after allowing deduction at 10 per cent against income from interest.
2. Being aggrieved the assessee carried the matter in appeal before the Commissioner (Appeals) who while upholding the decision of the ITO not to allow the set off of deficit against income from bank interest excluded miscellaneous receipts from the total income as determined by the ITO.3. Not being satisfied with the decision of the Commissioner (Appeals) the assessee is in appeal before us contending that the total income from all activities should have been determined first and as there was can overall deficit in the income and expenditure account nothing was liable to tax. In other words Shri Talatis submission was that the loss suffered by the assessee should be set off against the income from interest and as the said loss was in excess of the income from interest as aforesaid the total income ought to have been determined at nil.
Repelling this submission of Shri Talati the learned departmental representative submitted that the loss shown by the assessee in regard to other activities was not loss simpliciter but the deficit was not taken into consideration on the ground of mutuality under which the surplus was not exigible to tax. In other word, according to the learned departmental representative since the surplus does not constitute the assessees income on the ground of mutuality the loss in the instant case was required to be ignored and it could not be set off against any other income as the said deficit was not in the the nature of loss as is ordinarily understood. The exclusion of loss, therefore, was on the principle of mutuality as aforesaid and, therefore, it could not be income resulting in loss in which case the set off as claimed by the assessee was not permissible.
4. We have considered the rival submissions. In our view, the contentions put forth on behalf of the revenue deserve to be accepted.
There is a clear fallacy in the submission made by Shri Talati that income should be computed from all the sources against which the excess expenditure should be set off so as to determine the total income at nil. This contention clearly overlooks the fact that the excess deficit in the instant case represents expenditure over receipts in form of subscription, income from catering activating collection and guest fees. Now these receipts are not in the nature of income on the principle of mutuality. The activity carried on by the club according to several well settled decisions is not a commercial activity resulting in any profit. So also the loss. The deficit, therefore, is not in the nature of commercial loss but a deficit arising in course of carrying on mutual activity. Therefore, the loss as claimed by the assessee cannot be allowed against income from bank interest. The income from bank interest is not covered by the mutuality principles and is taxable as income derived by the assessee-club. It is true that the expression income includes loss but in order to allow the claim of loss such loss as pointed out earlier should arise in course of commercial activity which if resulted in profit would have been taxable as income. The principle of mutuality, therefore, which excludes surplus from taxation on the ground that such surplus is not in the nature of income. On parity of reasoning it must be held that a loss or deficit in court of carrying out the activities of the club cannot be treated as a loss which would be set off against income from any other source or sources. We, therefore, agree with the conclusion reached by the authorities below.