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income-tax Officer Vs. Poona Club Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Pune
Decided On
Judge
Reported in(1984)9ITD338(Pune.)
Appellantincome-tax Officer
RespondentPoona Club Ltd.
Excerpt:
.....conditions were satisfied and found that there was a clause in the articles of association of the assesseeclub which destroyed this essential identity of the contributors, i.e., the members of the club, to the common fund created through subscriptions and payments for various services and amenities and participators in the surplus of that fund. the offending clause, according to the commissioner, is clause 6 in the original articles and clause 5 in the revised version of the articles. it would be convenient to set out here the terms of these clauses: 6. no member other than a permanent member of the club shall be entitled to be elected a member of the committee of the club or to attend or vote at any general meeting of the club or be entitled to claim any assets of the club upon its.....
Judgment:
1. There are two appeals filed in this case by the department for the years 1977-78 and 1978-79 with corresponding cross-objections by the assessee and two appeals filed by the assessee against the orders of the Commissioner under Section 263 of the Income-tax Act, 1961 ('the Act') for the years 1979-80 and 1980-81. Since common points are involved in the appeals and the cross-objections, they are taken up together and will, be disposed of, for the sake of convenience, by this common order.

2. We would, at the outset, deal with an additional ground of appeal sought to be raised by the learned departmental representative in the appeals filed against the order of the Commissioner (Appeals) for the first two years, which is in these terms: Without prejudice to the grounds raised earlier, the Commissioner (Appeals) erred in holding that the income of the assessee is not chargeable on the grounds of mutuality when in assessee's case there is no complete identity between contributors to the fund and recipients of the fund.

We find that in the very first ground of appeal raised for the two years, the department raises the contention that the Commissioner (Appeals) erred in holding that the principle of mutuality was applicable in the assessee's case. The additional ground sought to be raised on behalf of the department in merely a repetition of the contention raised in the memo of appeal and it is not, therefore, any additional ground. For these reasons, therefore, the additional ground is rejected as infructuous.

3. The dispute between the department and the assessee centres around the question whether the assessee is entitled to its claim for exemption on the principle of mutuality. For all the four years under consideration, the assessee declared in its returns income from only one source and that is, the interest earned on its deposits with banks.

The ITO held that the assessee was also liable to be assessed under the head 'Income from house property' on the bonafide annual value of its properties consisting of cottage suites rented out to members and their guests. Against these assessments for the years 1977-78 and 1978-79, the assessee appealed to the Commissioner (Appeals) who by her consolidated order for the two years held, following the ruling of the Madras High Court in the case of Presidency Club Ltd. v. CIT [1981] 127 ITR 264, that the assessee's income from renting out the aforesaid properties was saved on the principle of mutuality. The department is in appeal against the Commissioner (Appeals)'s orders for the two years and the assessee has filed cross-objections thereto. For the other two years, the Commissioner took revision proceedings under Section 263 against the assessment orders holding that for the reasons stated in his order, which is also consolidated for the two years, the principle of mutuality did not apply in the assessee's case; on that finding he set aside the assessment orders directing the ITO to make fresh assessments on the basis that the principle of mutuality was not applicable. The assessee is in appeal before us against this order of the Commissioner.

4. Before proceeding to examine on the facts of the case whether the principle of mutuality is applicable, it would be well for us to keep in view the enunciation of the principle as made by judicial authority.

We could not do better for this purpose than to quote with respect the enunciation of this principle as made by the Madras High Court in the case of CIT v. Madras Race Club [1976] 105 ITR 433 et seq. where the question arose whether the subscriptions collected by the Madras Race Club from its members were exempt from tax on the principle of mutuality. This is what their Lordships held: in considering the case for exemption of the subscriptions collected from the members of the application on the principle of mutuality it is necessary to bear in mind two concepts. The first concept is that the principle of mutuality is based on the doctrine that no person can make a profit out of himself. To take a common instance, supposing a 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 a certain amount provisionally based on the anticipated price of the commodities to be purchased. If it ultimately happens that the commodities are available at a cheaper price so that at the end of the distribution of the commodities among themselves, a part of the 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. The Income-tax Act seeks to tax income and not savings ... (p. 443) The second aspect relates to cases of absence of a trade or business which produced profits. For instance, a members' club is intended to promote social intercourse among the members. It does not purchase or sell commodities. It is merely a convenient instrument for the purpose of providing facilities for the members. There is no element of profit or concept of trade in such a club. 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. Any surplus realised from the members would not have the character of income liable to be taxed.

(p. 444) 5. Bearing in mind the meaning and scope of the principle given by the Madras High Court in the aforesaid case, we may now proceed to examine whether, on the facts, the assessee's case falls within its scope. The asses-see, the Poona Club Ltd., was incorporated as a company under the Indian Companies Act, 1913, on 31-8-1931. We would note here for the sake of clarification that the articles of association drawn up originally were revised by a special resolution of the general body meeting on 28-7-1979, but there was no change in the memorandum. The objects for which it was established were set out in Clause 3 of the memorandum of association. Those objects in the main were to acquire and take over the assets and liabilities of two unincorporated bodies known as Poona Gymkhana Club and the 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 the members to establish, maintain and conduct a gymkhana club for the accommodation of the members and their friends and generally to afford to them all the usual privileges, advantages, conveniences and accommodation of a club and to enagage in and carry out activities and operations, including construction of club houses, pavilions, dwelling houses, bungalows and other conveniences for the members, in furtherance of the main objects.

6. All these objects quite evidently converged towards the primary aim and purpose which was to run a social club of the members and for their mutual benefit, by providing the usual forms and avenues of entertainment and amenities available in similar institutions. As much was accepted also by the ITO as far back as in the assessment for 1958-59, and his findings were confirmed in appeal that the club although a corporate body and registered under the Companies Act, 1913, was essentially a members' club and its dominant object was not to carry on any business but to provide certain amenities and conveniences to its members. The assessment of income was confined to two sources (1) 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 (2) 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.

7. There is no dispute before us as regards the assessment made in respect of the former category, i.e., income derived from interest on the assessee's bank deposits and securities; that income, therefore, is outside the purview of the subject-matter of the appeals or cross-objections under consideration. 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. Again what was let out was not only the 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 the assessee's case is covered under the principle of mutuality in either of the two aspects of the principle set out in the ruling of the Madras High Court in the case of Madras Race Club (supra). The Commissioner in his order under Section 263 drew an adverse conclusion keeping in view the classic statement of this principle in the case of Styles v. New York Life Insurance Co.

[1889] 2 TC 460 (HL) that in order to satisfy the requirements for the application of this principle, it has to be shown that all the contributors to the common fund are also the participators in the surplus. The Commissioner addressed himself to an enquiry as to whether in the assessee's case these conditions were satisfied and found that there was a clause in the articles of association of the assesseeclub which destroyed this essential identity of the contributors, i.e., the members of the club, to the common fund created through subscriptions and payments for various services and amenities and participators in the surplus of that fund. The offending clause, according to the Commissioner, is Clause 6 in the original articles and Clause 5 in the revised version of the articles. It would be convenient to set out here the terms of these clauses: 6. No member other than a permanent member of the club shall be entitled to be elected a member of the committee of the club or to attend or vote at any general meeting of the club or be entitled to claim any assets of the club upon its dissolution, but in all other respects every member shall be entitled (subject to any bye-laws for the time being in force made by the committee as hereinafter provided) to all the rights and privileges and to be subject to all duties of a member of the club.

5. No person other than a member of the club shall be entitled to be elected as a member of the committee of the club or to attend or vote at any general meeting of the club or be entitled to claim any assets of the club upon its dissolution and every member shall be entitled (subject to any bye-laws for the time being in force made by the committee as hereinafter provided) to all the rights and privileges and to be subject to all duties of member of the club.

9. Analysing these clauses, the Commissioner noted that there were different classes of members comprising the membership of the club and these were defined. 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. According to the Commissioner, this variation in the definition of members did not overcome the infirmity which, in his view, was fatal to the club's claim for mutuality, because one or more classes of members who, although they were contributors to the common fund, were excluded from participating in the surplus. This inference would necessarily follow, according to the Commissioner, since both the offending clauses deprive these classes to claim any assets of the club upon its dissolution. It is these words, it is contended on behalf of the department, which must lead to the interpretation that the surplus of the common fund was not distributable amongst ail the contributors to that fund, i.e., to all the members of the club.

10. We are, therefore, called upon to examine the precise meaning and effect of these words in the two clauses. In the first instance, it does not appear to us entirely free of debate that the right to claim any assets of the club upon its dissolution being vested with any particular class or classes of members necessarily spells out a scheme for distribution of the surplus on such dissolution. The assessee is a company, admittedly, limited by guarantee. Its income or property, as correctly held by the Commissioner (Appeals), was not distributable by way of dividend or profit amongst the members, But quite apart from that, the core question which we must ask ourselves is, precisely how is the term 'surplus' to be understood as used in the formulation of the principle of mutuality set out in Style's case (supra) What was this surplus in the contemplation of their Lordships in that case For finding the answer, a reference to the facts of that case would be necessary and we would with great respect reproduce those facts from the resume given in Madras Race Club's case (supra).

... In Styles v. New York Life Insurance Co. [1889] 2 TC 460 (HL), a company had no shareholders and no shares. It issued life policies of two kinds, participating and non-participating. In the case of participating policies, the policy-holders had a voice in its administration and were entitled to a share of its assets and liable to all losses and expenses incurred by the company. The non-participating policy-holders were merely creditors without any interest in its assets and without any liability for its debts. The rate of premia paid for participating policies was different from or higher than that applicable to non-participating policies. In the case of participating policies the premia were not fixed, but fluctuating. A calculation was made of the probable disbursements of the company on account of expenses and other liabilities and the amount claimed as premia from policy-holders was adjusted in conformity with the estimate. Then an account was annually taken of the transactions of that company, and the excess of the premia received from the members over expenditure after carrying part to a reserved fund, was repaid to them. The question was whether the surplus which was available with the company in excess of its requirement in relation to the participating policies was liable to be taxed even though it was actually returned later on to such policy-holders. The House of Lords by majority held that so much of the surplus was not profit that was taxable... (p. 444) 11. Thus, the concept of surplus given to us in Styles' case (supra), in the distribution of which the identity of the contributors to the common fund and the participators must be found so as to invoke the principle of mutuality, is that of the excess of receipts over expenditure found when the annual accounts of the concern claiming to invoke it, are taken. That concept has nothing to do with the surplus that might arise on the dissolution of that concern. Following this concept, the true test to our minds would appear to be to examine whether the benefit of the surplus is available as a matter of right to all the members of the assessee-club, who had contributed to its funds, such surplus being the excess of receipts over the expenditure as found from the annual accounts, and not a hypothetical surplus, which may not even come into existence upon dissolution of the club, if at all it were to be dissolved, on some unknown date in the distant future. We find sanction for the rationale of the view which we are taking from a ruling of the Supreme Court in the case of CWT v. Trustees of H.E.H.Nizam's Family (Remainder Wealth) Trust [1977] 108 ITR 555. That case arose under the Wealth-tax Act, 1957, and the question before their Lordships was whether the shares of the beneficiaries could be held to be determinate and known. Their Lordships were pleased to approve of the observations of Shelat, CJ., in the case of Padmavati, Jaykrishna Trust v. CWT [1966] 61 ITR 66 (Guj.) quoting the following passage from that judgment: These decisions arc clear authorities for the proposition that in determining whether the shares of beneficiaries are determinate and known, so that assessment should be made under Sub-section (1) of Section 41 of the Income-tax Act, what the revenue authorities have to see is whether such shares are known, and specific during the accounting period. If these facts are known Sub-section (1) and not the first proviso would apply and it does not matter that the number of beneficiaries might vary in future. Tax being leviable with reference to the income of the year of account, the crucial fact is not what is the general position but what is the position during the year of account. If during that year the number of beneficiaries is known and specific and their shares in the income are capable of determination, it would be sufficient and Sub-section (1) of Section 41 would apply and the exceptions laid down in the first proviso thereof would not apply. The language used in Sub-sections (1) and (4) of Section 21 being similar to that in Sub-section (1) of Section 41 and the first proviso thereof, there is no reason why the same interpretation should not apply to the provisions of Sub-sections (1) and (4) of the Wealth-tax Act." (p. 575)--These decisions are--Khan Bahadur M. Habi-bur Rahman v. CIT [1945] 13 ITR 189 (Pat.) and CWT v. Puthiya Pon-manichintakam Wakf [1961] 63 ITR 787 (Ker.).

We draw guidance from this ruling for the proposition, which is the foundation for the view we have taken, that tax being leviable with reference to the income of the year of account, the crucial fact is not what is the general position but what is the position during the year of account.

12. If we, therefore, 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. 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 the club. Nor was the right of participation in the surplus which was available to all the members destroyed, as the department would have it, merely because there was a possibility of deviation if a hypothetical situation arose in some distant future.

13. We would now proceed to examine the assessee's case on the second aspect of the principle of mutuality set down in Madras Race Club's case (supra), i.e., to determine whether there was any trading or profit motive in the transactions between the 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 the assessee-club in these transactions. The Commissioner (Appeals) was, in our view, entirely correct in applying the ruling of the Madras High Court in the case of Presidency Club Ltd. (supra), so as to hold that the 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. The income which was sought to be assessed under the head 'Income from house property' was, therefore, not liable to assessment.

The department has sought to rely on the ruling of the Allahabad High Court in the case of CIT v. Wheeler Club Ltd. [1963] 49 ITR 52. That case has been dissented from in the ruling of the Madras High Court in Presidency Club Ltd.'s case (supra), on which we respectfully rely.

That case has also been distinguished by the Allahabad High Court in the case of CIT v. Cawnpore Club Ltd. [1983] 14 Taxman 211. The distinction made in that case, to the effect that in Wheeler Club Ltd.'s case (supra), the Court did not have occasion to consider that the income in question being property assessable under the head 'Income from other sources', the mutuality principle would become applicable to such income, equally applies in the assessee's case. We would respectfully rely on the latter Allahabad High Court's ruling in support of our conclusion.

14. We would now consider the other authorities relied upon on behalf of the department. Reliance is placed on the ruling of the Madhya Pradesh High Court in the case of CIT v. Mathuralal Kapoorchand & Co.

[1983] 141 ITR 297. In that case the question was whether the claim for bad debt could be allowed on the ground that the debtor who owed the debt to the assessee had filed an insolvency petition. It was held in that case that merely from the statement of the assets and liabilities filed by the debtor in the insolvency proceedings, it could not be determined whether the debt was a bad debt or to what extent it was a bad debt. This case is called in aid to raise the contention that in order to examine whether the contributors to the common fund were also participators, the surplus to be taken into consideration could only be such surplus arising on the dissolution of the club. Apart from the fact that, in our view, this case is not relevant at all, the meaning sought to be given to the term surplus by analogy with a bad debt is erroneous.

15. The next case relied upon is that of the Bombay High Court in the case of Sir Currimbhoy Ebrahim Baronetcy Trust v. CIT [1963] 48 ITR 507. The question which arose in that case was, whether the income from property was assessable in the hands of the trustees of a Baronetcy trust. It was held in that case that since the trustees were the owners of the property and the liability for assessment of the income from property arose from the fact that the assessee was the owner of the property, the annual value of the property was liable to be assessed in the hands of the trustees. No question arose in that case of claiming exemption on the principle of mutuality. For the same reasons, no assistance is available to the department from the rulings of the Bombay High Court in the 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 the reasons discussed in the foregoing paragraphs, we would uphold the order of the Commissioner (Appeals) for the two years and dismiss the department's appeals for the years 1977-78 and 1978-79. On the same grounds, we set aside the order of the Commissioner under Section 263 for the subsequent two years and allow the assessee's appeals for those two years.


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