1. In this reference under s. 256(1) of the I.T. Act, 1961, the following question has been referred to this court :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 4,305 is chargeable to income-tax ?"
2. The assessee was incorporated as a public limited company by guarantee and runs a club for its members. Its objects are to promote social intercourse among the members of the club, their families and friends and to provide a club house and grounds for the accommodation of members and their families and the friends of members temporarily staying with them. Noportion of the income or property is to be paid or transferred directly or indirectly by way of dividend, bonus or otherwise by way of profit to persons who at any time were or have been members of the club or to any one or more of them or to any person claiming through any one or more of them. Except with the previous approval of the Central Govt. no remuneration or other benefit in money or money's worth is to be given by the club to any of its members, whether officers or servants of the club or not. The only exception made is in respect of payment of out-of-pocket expenses, reasonable and proper interest on money lent to the company and proper rent on premises let to the club.
3. In accordance with the above objects, the assessee provided temporary accommodation in its premises in No 7, Commander-in-Chief Road, Madras-8. There are furnished rooms within the club premises and during the year of account which ended on July 31, 1971, relevant to the assessment year 1972-73, it received a sum of Rs. 4,305 by way of rent from the occupation of these rooms. Treating this as income from house property, the ITO brought to tax a sum of Rs. 2,054. On appeal, the AAC upheld the order of the ITO. The assessee took the matter on further appeal to the Tribunal and contended that the receipts from the members for the stay in the club premises did not represent any income, but a receipt as a result of mutual association. For the department the contention was that the assessee being a public limited company, there was no identity between the shareholders and the assessee and that the income from the property was liable to be assessed under the provisions of ss. 22 to 27. In the view of the Tribunal, the principle of the mutuality did not apply to the income received from renting out the premises along with the amenities to the members. The assessment was thus confirmed by the Tribunal also. The assessee has brought the matter on a reference to this court with reference to the question set out earlier.
4. The Supreme Court has examined the question of taxability of profits of a members' club in CIT v. Royal Western India Turf Club (1953) 24 ITR 551. The assessee in that case was also a company limited by guarantee. It carried on the business of maintaining a race course and of licensed victuallers and refreshment purveyors. There were two categories of members who, on their election as members, paid an entrance fee and periodical subscriptions, which were not charged to tax. Members were provided with a separate enclosure to watch the races for which an admission fee was charged and non-members were not admitted to this enclosure. The non-members were given, in a separate enclosure, the facility of watching the races and betting on the horses. All of them could use the totalizator and the facility for refreshment. The assessee claimed that in computing its total income, certain receipts from members should not be taxed. The High Court held that some of those items were not taxable either under s. 10(1) or under s. 10(6) of the Indian I.T. Act, 1922, while the amounts of income received from the members whose horses did not run in the race during the season were liable to be taxed. The Supreme Court held that there was not mutual dealing between the members inter se, and that all the items of receipts were received from the members in the course of a business with its members within the meaning of s. 10(1) and, therefore, assessable to tax. In the course of the judgment, the earlier cases decided in U.K. have been considered at p. 565. After referring to the earlier decision on the point, it was observed (p. 565) :
"As already stated, in the instant case there is no mutual dealing between the members inter se and no putting up of a common fund for discharging the common obligations to each other undertaken by the contributors for their mutual benefit. On the contrary, we have here an incorporated company authorised to carry on an ordinary business of a race course company and that of licensed victuallers and refreshment purveyors and in fact carrying on such a business. There is no dispute that the dealings of the company with non-members take place in the ordinary course of business carried on with a view to earning profits as in any other commercial concern. It is further admitted that some of the dealings of the company with its members take place in the ordinary course of business and the profits arising out of those dealings, e.g., the fourth item of receipt of Rs. 82,490 (income from entries and forfeits received from the members whose horses did not run in the races during the season) are taxable. The company gives to its members the same or similar amenities as it gives to non-members, namely, the use of an unreserved seat in a stand, the facility to watch the races and to bet on the horses in the races, use of the totalisator in that stand and the facility for refreshment. In fact the daily ticket fee for admission into the members' enclosure is exactly the same as that for admission into the first-enclosure to which the public have access. The only difference is that a separate enclosure with a separate totalisator is provided for the members where they can meet their follow members and not be disturbed by the intrusion of non-members. This privilege is referable to their membership of the company for which they pay an entrance fee on their election as members and for which they pay the periodical subscriptions both of which are not sought to be brought to charge. The rest of the facilities mentioned above which the members get are in substance the same as those enjoyed by the public..... In the circumstances, all the four items of receipts from members must be taken into account in computing the total income of the company."
5. In the course of the judgment, reference was made to United Service Club v. Emperor, ILR 2 Lah 109; AIR 1921 Lah 208. There, the club was an incorporated company having no dealings with and, therefore, deriving no profit from outsiders. The question raised was whether the income derived from its members was taxable profit. It was held that the income derived by the club from its members was not liable to tax. The proposition was found by the Supreme Court to overlook the real grounds of the decision of the English Cases which were applied therein. It was pointed out that the decision in that case could be supported only on the ground that the club did not really carry on any business with its members with a view to earning profits and, therefore, the surplus of receipts from the members with a view to cover the expenditure could not be said to be profit of any business which could be assessed to tax. This case is thus an authority for the proposition that unless a trade with a profit motive was indulged in by the club, whether exclusively with members or with non-members also, there could be no assessable income. In the case of a club which was carrying on business, whether with the members alone, or with the members and outsider, the business activity which yields profits would be of a commercial nature, and merely because a club indulges in it, it would not give it any exemption. However, the position of a club which does not carry on any commercial activity would be wholly different. The basic principle of mutuality, that one cannot make any profit out of himself, would apply to all non-commercial activities.
6. The learned counsel for the Commissioner relied on two decisions in support of his contention that the income was liable to be taxed. The first decision is that of the Supreme Court in CIT v. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241. In that case, a company carried on banking business restricted to its shareholders. It received monthly contributions by way of recurring deposits from the shareholders, and, at the end of a fixed period, returned an amount covering the deposits and guaranteed interest thereon for that period. Loans were granted to those shareholders who applied for them and interest was realised on those loans. A shareholder was entitled to participate in the profits as and when dividend was declared, even though he had not taken any loan from the company. The question was whether the company was assessable to tax on the profits derived from the transactions with its shareholders. It was held that the principle of mutuality did not apply and that the profit of the company was taxable in its hands. The essential feature in that case to be noticed can be brought out from a passage, which occurs at page 249 and which runs as follows :
"It seems to us that it is difficult to hold that Styles' case (1889) 2 TC 460 (HL) applies to the facts of the case. A shareholder in the assessee company is entitled to the 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 fulfil 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 receive 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."
7. Even where a club was taken to indulge in a profit-making activity, it was held in National Association of Local Government Officers v. Watkins (1934) 18 TC 499 (KB) that the liability would be confined to the profits made from the non-members. That was a case where a trade union had an object of promoting the physical and social welfare of its members. It purchased a holiday camp to provide cheap holiday facilities for its members, their wives, families and friends. In the year of purchase, however, it accepted bookings from non-members who had previously used the camp. The question was whether the surplus arising from occupation of the camp by the members and non-members was liable to be taxed. It was held that the liability was confined to the profits made from non-members. In the course of the judgment, Finlay J. pointed out at p. 506 :
"It may be that where you have a separate entity, where you have a company, in a great many cases the test is that you have to look at the subscribers, look at the participants, and see if they are the same. Here, it seems to me to lie at the root of the thing that the property was not the property of the association; it was the property of the members themselves, and in a case such as that, I think it is impossible-at least, so it seems to me, with the utmost deference-to apply the Solicitor-General's principle. I cannot think that you can, in the case of a club, isolate the dining room, the library, or the other various facilities which are offered by the club. The truth of the matter is, I think, that the members own the whole. The members have a right to participate in the whole. Some members will participate in some things. Some members will participate in other things, but to no members can there truly be said to be a sale. There is, I think, no trade among the members. The cannot trade with themselves. It is upon that ground, I am afraid very imperfectly expressed, but which is fundamental and lies at the root of the thing, that I think that, so far as this camp was used by the members, no profit could accure from its user. Noprofit could accrue, any more than profit could accure from any particular thing done, from the management, say, of the dining room of an ordinary club."
8. It is common ground that incorporation by itself does not authorise the charge to tax of the surplus arising to the club. As pointed out by the Supreme Court in CIT v. Royal Western India Turf Club (1953) 24 ITR 551 at p. 560 :
"The principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing per se to prevent a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does not come back to them as persons who had contributed them. 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 own members. What kinds of business other than mutual insurance may claim exemption from tax liability under section 10(1) of the Act under the principles of Styles' case (1889) 2 TC 460 (HL) need not be here considered; it is clear to us that those principles cannot apply to an incorporated company which carries on the business of horse racing and realises money both from the members and from non-members for the same consideration, namely, by the giving of the same or similar facilities to all alike in course of one and the same business carried on by it."
9. These principles were applied in CIT v. Madras Race Club . In that case, there was participation in horse
racing by members and non-members. The question was whether the surplus attributable to members' subscriptions was not chargeable to income-tax. After examining several decisions, the legal principle was set out in the following words at pp. 443-444 :
"The first concept is that the principle of mutuality is based on the doctrine that no person can make a profit out of himself.... There is, however, nothing per se to prevent a company making a profit out of its own members.....
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."
10. The eligibility for exemption based either on mutuality or absence of profit motive was emphasised at page 446 in the following words :
"..... a company may be eligible for exemption of any surplus derived from the dealings of the members either on the principle of mutuality based on the doctrine that no one can make profit out of himself or on the basis that there is no trading or profit motive in the transactions between a club and its members."
The legal position applicable to a members' club was reiterated at page 450 as follows :
"This is not also a case of a mere members' club which comes into existence for the purpose of providing certain amenities to the members without any business element as such as in CIT v. Merchant Navy Club ."
11. On the facts of that case, it was held that the surplus arising out of the members' subscriptions was also taxable, as there was no essential difference between members and non-members in the matter of participation in the races, which were run as a business proposition.
12. As the assessee has not indulged in any trade or business as such, it is not necessary to go into the question whether it made any profit out of its members in the same way as it could, if it had dealt with strangers as in the case of CIT v. Madras Race Club . The assessee here is merely organising a social activity confined to its members. The rooms were put up out of the funds of the club which arose to it from the contributions of the members. The character in which the contribution was made was that of a member. Whoever occupies the premises did so as a member of the club. Any surplus was not distributed among the members as dividends or bonus or otherwise, as the club was prevented from doing so by the clauses in the memorandum already adverted to. It would therefore, follow that this is a case where there is no activity which was designed to make any profit as such, and the profit, if any, was only incidental to the activities which are mutual in nature. The benefit, if any, arising from the surplus would only reach the members in their character as members and not otherwise. The mere circumstance that all the members of the club do not occupy the premises cannot have any significance, and it is impossible in the nature of things in a members' club that there should be any such simultaneous participation by all the members. It is in this context that the passages extracted earlier from National Association of Local Government Officers v. Watkins  18 TC 499 (KB) at p. 506, a decision cited with approval by the Supreme Court in CIT v. Royal Western India Turf Club Ltd.  24 ITR 551, throws some light.
13. The learned counsel for the Commissioner relied on another decision of the Allahabad High Court in CIT v. Wheeler Club Ltd.  49 ITR
52. In that case, the assessee, a limited company, was running a club for its members, and not for any outsiders, providing amenities like residential quarters exclusively to its members on payment of rent. The assessee received a sum of Rs. 10,062 by way of rent, and the income derived from the occupation of the rooms was brought to tax as income from property under s. 9 of the Act. The Allahabad High Court held that the principle of mutuality did not apply to such a case and that the club was rightly taxed under s. 9. It was pointed out that, only when the assessee's income was from business, the principle of mutuality would be applicable. We are unable, with respect, to agree with this decision. We have already seen that the Supreme Court has indicated how the principle of mutuality applies to cases other than business. If a club sets about on an adventure of a commercial nature, it would lose its identity as a club, as comprehended by law or in popular parlance and it cannot lay any special claim for exemption. The statute does not provide for any such exemption in the case of clubs merely because they call themselves so. In so far as the decision of the Allahabad High Court runs counter to that of the Supreme Court, it would not be good law.
14. 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 and 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 I.T. 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.
15. In this view, we answer the question in the negative and in favour of the assessee. The assessee would be entitled to its costs. Counsel's fee Rs. 500.