Per Shri George Cheriyan, Accountant Member - This appeal is by the assessee. The appeal relates to the assessment year 1978-79. The assessee-club, for the accounting year ended 31-3-1978, filed a return showing a nil income. The assessee had exhibited figure of Rs. 75,248 as income from house property but had claimed the entire amount as excludible and, hence, a nil return was filed.
2. The ITO noticed that the aggregate rents received came to Rs. 85,192 He, therefore, went into the issue as to how the rent came to be earned and found that the rent was received from a building constructed by the assessee which had been let out on lease to the Indian Airlines Corporation. The assessee claimed that the income was exempt on the ground of mutuality. The ITO was of the view that exemption on the ground of mutuality really applied only where income was derived from business or profession and there was no provision for exemption income under the head Income from house property. He held section 22 of the Income-tax Act, 1961 (the Act), was applicable and since the assessee was the owner of the property, the income derived from outsiders by letting out the property was clearly taxable. He also stated that the plea of mutuality was unacceptable in any event because the rent was received from a third party, viz., Indian Airlines Corporation. After allowing deduction of municipal taxes and statutory deduction on account of repairs, the ITO brought to tax net property income of Rs. 63,153.
3. Another amount brought to tax was Rs. 12,138 under the head guest fees. So also, income attributable to guests from the canteen, bar, etc. taking the same at 8 per cent of overall income, was brought to tax. This came to Rs. 9,360. The aggregate of the amounts of Rs. 12,138 and Rs. 9,360, i.e. Rs. 21,498, was taxed under the head Profits and gains of business or profession.
4. Apart from this, the ITO stated that the income and expenditure account showed receipt from furniture hire of Rs. 14,513. In the absence of a claim for depreciation and in the absence of details of the value of furniture, etc. hired out, the gross receipts from this source were brought to tax under the lead Income from other sources.
The only other item taxed was interest on fixed deposits of Rs. 200 making a total income of Rs. 99,360.
5. The assessee appealed to the AAC. The AAC agreed with the assessee that the receipt of guest fees could not be taxed since the payment for guests was made by the members themselves and it was, therefore, exempt on the ground of mutuality. The decision rendered in this regard, thus, excluded from the assessment the aggregate amount of Rs. 21,498.
6. As far as the income from letting out the property was concerned, the assessee, relying on the decision in CIT v. Merchant Navy Club  96 ITR 261 (AP), had contended that any surplus accruing from subscriptions and charges paid by members for various conveniences is not income of the club nor can a social club be deemed to trade with its members. In view of the decision in the case of Presidency Club Ltd. v. CIT  127 ITR 264 (Mad.), it was contended that the income of the club was not taxable. I was also urged that the ration of the decision in the case of CIT v. Wheeler Club Ltd.  49 ITR 52 (All.) was not applicable. The assessee contended that according to the minutes of the managing committee meeting held on 30-9-1974, it was decided to pursue the offer of Indian Airlines Corporation for taking on rent a building to be constructed by the assessee and resources were raised by increasing the number of members of collection of advance from members, etc. The AAC observed that the President of the club was authorised to take a loan to the extent of Rs. 2 lakhs to proceed with the construction of the present building and since it was stated that the object of the club was to distribute the surplus income to its members, the case was different from that of Presidency Club Ltd. (supra) in which no portion of income from property was to be transferred either directly or indirectly by way of dividend, bonus or otherwise to persons who were members of the club. According to the AAC, in the case of Merchant Navy Club (supra), some extra money was paid for amenities and it was held that the supplies made to members were for a price and were not sales for profit and the club was acting as an agent of the members for making supplies to them and, therefore, the sales were not in the nature of trading activity and the surplus realised was not a profit assessable to tax. The AAC also stated that even in the case of Presidency Club Ltd. (supra), it is held that where a person carries on a business or commercial activity, there could be no exemption from tax even where the person carrying on such activity was a club. The AAC emphasized that the premises in the present case was let out to Indian Airlines Corporation not for any temporary user, and such letting out was to a third party and not to members or their guests, and the transaction clearly partook the nature of a commercial activity for which there was a regular lease agreement. In view of this and having regard to the ration of the decision such as in the case of CIT v. Madras Race Club  105 ITR 433 (Mad.) Carlisle & silloth Golf Club v. Smith (Surveyor of Taxes)  6 TC 198 (CA) and National Association of Local Government Officers v. Watkins (Inspector of Taxes)  18 TC 499 (KB), the AAC was of the view that the rental income received in the present case was taxable. In particular he pointed out that the income was not referable to any amenity provided for the members by themselves, that the property was let out to a third party which was not connected in any way with any members and since the property was let out on the basis of written lease agreement, the transaction really amounted to that of a commercial nature. The AAC, therefore, held that the ratio of the judgment in the case of Presidency Club Ltd. (supra), did not apply and the income from property was taxable in the hands of the assessee. This decision, he stated, was equally applicable to the letting out of furniture and fixtures. Therefore, the AAC sustained assessment of property income of Rs. 63,153 and income from hiring of furniture of Rs. 41,513.
7. The assessee is in appeal. In relation to the taxability of the income from property, the learned counsel took us through the various resolutions and submitted that the property was primarily constructed out of donations and deposits made by the members alone plus the advance of Rs. 1 lakh made by the Indian Airlines Corporation, which was the lessee. Having regard to the decision of the Andhra Pradesh High Court in Merchant Navy Clubs case (supra), he submitted that the property did not belong to the club but it only belonged to the members. Therefore, what is effect happened was that the members were just getting the terms for the deposits, etc., made by them. The income earned from the property was just a return from a convenient investment made for providing more facilities to members. He want on to urge that according to the observations of their Lordships of the Andhra Pradesh High Court in the aforementioned case of Merchant Navy Club (supra) the essence of mutuality is only to find out whether the club trades with an outside body. The concept of the word trade was much narrower than the concept of the term business. By merely letting out a property; he went on to state that there was no trade with an outside body. Reliance was placed on the decision of the Madras High Court in the case of CIT v. Madras Stock Exchange Ltd.  105 ITR 546 for putting forth a proposition that mere purchase of building or making an investment and getting income therefrom would not be an activity for profit. A person who lets out a property and enjoys income therefrom was really not carrying on an activity for profit. It was only a passive receipt of return for investment. Reliance was also placed on the decision in the case of Presidency Club Ltd. (supra), to reinforce the proposition that unless a trade with profit motive was indulged in by a club, whether exclusively with its members or non-members, there could be no assessable income.
8. The learned departmental representative in his turn also sought to derive support from the decision of the Andhra Pradesh High court in the case of Merchant Navy Club (supra) and submitted that the real test was to see whether there was a commercial venture, and as long as there was surplus had to be taxed. Another contention put forth by him was that in the present case the club was the legal owner of the property and, therefore, in terms of section 22 the income derived by letting out the property was clearly taxable, since the assessee was the owner of the property. On this point alone, he submitted, the inclusion of the property income had to be upheld.9. The learned counsel for the assessee in reply contended that it was the members of the club who were the owners of the property and he reiterated there was only return for investments and since the members were the owners, the question of assessing the club did not arise.
10. We have considered the rival submissions. The club was situated on a plot and the managing committed considered that the roadside land to the north of the In gate could be utilised in a appropriate manner for improving the resources of the club. So an extraordinary general body meeting held on 10-6-1973 considered two proposals : one was to lease the land to a petrol pump for two years and the second was to construct showrooms from advances made by the tenants. The latter proposal was accepted, i.e., to construct showrooms and by resolution on 28-12-1973 the managing committee decided that on 24-1-1974 foundation for the proposed showrooms would be laid. Thereafter, on 13-9-1974 the managing committee decided that on 24-1-1974 foundation for the proposed showrooms would be laid. Thereafter, on 13-9-1974 the managing committee considered a letter received from the Indian Airlines Corporation regarding the lease and construction of building, which the assessee could put up. The managing committee appealed to all members to make advances for this purpose and a drive was also authorised. The total estimate of cost was about Rs. 3.25 lakhs. On 3-12-1974 at the extraordinary general body meeting, the members were informed that there was a firm offer from Indian Airlines Corporation to take the proposed premises on lease and they were prepared to advance a sum of Rs. 1 lakh provided two-thirds of the work was complete. In the agreement of the lease dated 19-4-1975, there was the mention that the Indian Airlines Corporation has advanced Rs. 1 lakh towards expenditure. The aforesaid resolution, minutes, etc., in our view, go to show that with the object of raising resources of the club, the managing committee had examined various proposals to earn income. These proposals contemplated constructing and letting out property to third parties. Initial proposal was to construct showrooms which was abandoned in favour of a single building being constructed and being let out to Indian Airlines Corporation. In the case of Merchant Navy Club (supra), having regard to the ratio of the various cases, their Lordships of the Andhra Pradesh High Court have summarised the principles of mutuality as under : "No person can trade with himself and make an assessable profit. It 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 identical body. That does not 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 is 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 for 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 in 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". (p. 273) In has been emphasised that the contributors to the common fund or participators in the surplus must be an identical body, if the principal of mutuality is to apply. In the present case, the property has been let out to Indian Airlines Corporation. As pointed out in the aforesaid decision, the Club is the legal owner of the property though for all practical purposes the members can be considered to be the owner. The rent is paid by Indian Airlines and the said organisation has to be considered as the contributors to the common fund. The participants in the surplus are the members of the club and, therefore, this is not a case where the contributors to the common fund and the participators in the surplus are identical. At page 266 of Merchant Navy Club (supra) their Lordships had pointed out the essence of mutuality is only to find out whether the club trades with an outside body. The learned counsel for the assessee submitted that the letting out of property could not amount to trade which, according to him, was a much narrower concept than business. We have the following illuminating observations of the Madras High Court in the case of Presidency Club Ltd. (supra), The whole concept of a members club is sharing of common amenities in a spirit of camaraderie. The letting out of the building in the present case cannot be considered as sharing of amenity for the return was to be utilised for improving the amenities.
Occupation by the India Airlines Corporation is not referable to an amenity provided by the members for themselves. The concept of the word trade, in our view, with reference to the activities of the club is not confined to dealing in any merchandise alone as long as the club enters in to a commercial venture. We are of the view that there would be trade when the returns from such commercial venture is received from an outside body and the principal of mutuality would come to an end 11. In the present case, the idea originally was to construct a number of shops. This ideal no doubt was later abandoned and the learned counsel for the assessee emphasised that we should not decide the case on any hypothetical assumption, namely, as to what would have been the position had shopping complex been constructed when in effect no such complex was constructed. We agree that our decision should not be influenced by any hypothetical consideration but how the object of constructing a building and leasing out it to Indian Airlines Corporation came to be evolved and eventually fructified is relevant for deciding whether the club had undertaken any commercial venture or not. The club had examined in detail how the land could be exploited in order to secure best returns to improve the resources of the club. The fact that eventually only one building was constructed instead of several cannot detract from the conclusion that the venture undertaken in the present cause was purely a commercial venture unlike in the case of Presidency Club Ltd. (supra) and other cases relied on by the learned counsel for the assessee. We have, therefore, to hold that notwithstanding the purpose for which the building was constructed and let out, namely, to obtain return and to improve the amenities of the club, any income obtained by leasing out of the property will have to subjected to tax. We, accordingly, uphold then taxability of the income from this source. Regarding the furniture hire, no specific details could be obtained for this year on the basis of which it could be urged that the income of rental nature was not from a commercial venture. In such circumstances, we are unable to interfere on this aspect of treating the receipt from hiring of furniture as income.