TMI Blog2006 (8) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A)-I, Bhubaneswar, is bad in law and not evidenced. 3. That the rejection of books of account under s. 145 of the IT Act, 1961, is bad in law and not evidenced. 4. That the rejection of the standard accounting procedure adopted by the club is bad in law and not evidenced. 5. That the capital receipts of entrance fees from members amounting to Rs. 12,20,000 and a capital receipt of Rs. 3,00,000 from ITC Ltd. were arbitrarily held to be revenue receipts by the learned AO and the same was confirmed while adjudicating the appeal by the learned CIT(A) is bad in law and not evidenced. 6. That the addition of a sum of Rs. 36,350 on entertainment account by disallowing a loss arising on this account to a tune of Rs. 5,41,338 is bad in law and not evidenced. 7. That disallowance of establishment expenses to a tune of Rs. 1,78,000 from out of a total claim of Rs. 17,85,203 and disallowance of losses arising out of card room, billiards, tennis and other games to a tune of Rs. 1,24,556 on an arbitrary basis is bad in law and not evidenced. 8. That the view taken by the learned CIT(A) on the procedure adopted by the appellant for induction of new members is bad in law and not evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e members of affiliated clubs. Such affiliated clubs cannot be claimed as contributors to the common fund in the status of member. Therefore, it is evident that even the normal activities of the assessee include those which geared to the non-members. As such, the AO came to the conclusion that the concept of mutuality is not applicable to the assessee's functioning and it can be simply concluded that the entire fees received by it from its members were revenue receipts. Finally, the learned AO concluded that: "In view of the detailed discussion made in the body of the order, the inability of the assessee to discharge its onus establishing conclusively that it is a mutual concern where mutuality is evident from the manner of maintenance of books of account and records and the other related and circumstantial evidences discussed, it is therefore, reasonable to conclude that the activities of Bhubaneswar Club Ltd. are not in the nature of mutual activities between a group of members who are identical as contributors and participators in privileges/benefits/surplus. Merely having the nomenclature of a 'club' is not enough to prove that it constitutes a mutual undertaking. The claim m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,87,406 B. Receipts from ITC as per discussion 3,00,000 C. (1) Entrance fee as per discussion 12,20,000 (2) Development fee as per discussion 6,63,375 (3) Mutual benefit fund (net) as per discussion 82,000 Total income: 30,52,781 Or say: 30,52,780 --------- 5. When the matter came up before the CIT(A), the learned CIT(A) rejected the claim of the assessee that the club is an assessee of mutual concern and its income is exempt. He held that the AO was justified in rejecting the books of account and resorting to the provision of s. 145. He, however, allowed relief to the assessee by deleting certain additions, hence, aggrieved by the order, the Revenue is also in appeal before us with the following grounds: ITA No. 117/Ctk/2000 "On the facts and in the circumstances of the case,. the learned CIT(A) is not justified in deleting the addition of Rs. 6,63,375 representing development fees and Rs. 82,000 representing mutual benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining a positive income and charging of the same to tax. It is pertinent to mention here that the assessee has disclosed a loss not only in the return for the asst. yr. 1997-98 but for all the preceding years right from the year of filing of return. The AO completed the assessment on 29th March, 2000 under s. 143(3) of the IT Act rejecting the assessee's claim that its income would be exempt on the principle of mutuality, and computing the total income at Rs. 30,52,780 disallowing certain expenses partly and treating certain incomes claimed as capital receipts as revenue receipts. On appeal, the learned CIT(A) while upholding the decision of the AO to deny the benefit of mutuality to the assessee, has allowed its appeal partly granting a relief of Rs. 7,45,375 by his order in ITA No. 11/Co/2000 dt.28th Dec., 2001. The aforesaid order of the learned CIT(A) is now under challenge before the Hon'ble Tribunal by both the assessee and the IT Department. 3. Law relating to mutual trading or mutual undertaking or members club: Principle of mutuality: There is no provisions in the IT Act exempting the incomes of a mutual undertaking or members club. The principle of mutuality is based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at of trading begins is a difficult and vexed question. A host of factors have to be considered to arrive at a conclusion. Whether or not the persons dealing with each other are a mutual club, or carrying on a trading activity or an adventure in the nature of trade is largely a question of fact. 4. Assessment proceedings and information available in the assessment records: Return of income for this asst. yr. 1997-98 disclosing a loss of Rs. 7,39,460 was filed on20th March, 1998. It is evident from the assessment records that the assessment proceeding in this case were initiated by issue of notice under s. 143(2) on16th March, 1999. Subsequently, notices under s. 143(2) were issued calling for specific information and books of account. Hearings before the AO took place on various dates over a period of 12 months and the order-sheet notings in respect of such hearings, as are found in the assessment record, clearly show that adequate opportunities were provided to the assessee to prove the various claims it had made in the return of income and the accompanying accounts. The various books of account produced by the assessee in the course of such hearings were also thoroughly exami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To understand the same please kindly note the accounting procedure adopted for all the receipts: (a) Subscription fees (includes development fees which is treated as capital receipt) the same is collected on monthly basis for which monthly bills are raised. (b) Bar and kitchen The bills and raised immediately after use of the facility and mostly cash is collected. As such it would be stated that no records are maintained for individual members but for credit sales and these too are maintained till realization of dues only. Therefore it is not possible to furnish any details of members using such facilities. (c) Card room, billiards, entertainment tennis and other games The procedure for realization of these heads from members is same as above and especially in respect of entertainment, it is fully on cash basis, as such, no details are available for individual member. (d) The details of souvenir collection (earlier year collection) are for a sum of Rs. 2,59,500 and the same is from earlier year". Vital information that the above written submissions contain: From the above submissions, it is crystal clear that the assessee company does not maintain any records sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st so received cannot be said to be out of any mutual trading activity. (E) Ledger extract in respect of bank interest This reveals that the assessee had received interest from NICCO UCO Financial Services Ltd. and certain banks to the tune of Rs. 6,30,114 on loans and deposits. Such receipt of interest is not on account of any mutual trading activity, and hence, is chargeable to tax. 5. Reasons for which the AO has rejected the assessee's claim for exemption on the principle of mutuality: 1. The assessee has categorically expressed its inability to establish that the receipts shown under the heads of various activities such as entertainment, Kitchen, bar, etc. have flown only from the members. It has failed to discharge its onus of establishing that all its receipts have flown only from its members and that the participators in the privileges/conveniences and the contributors are identical. 2. On examination of the books of account and the submissions made in the course of hearings, the irrefutable conclusion that emerges is that the assessee cannot, and has not been able to prove that the receipts under the various heads of activities have flown only from the members an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its income in view of the strict provisions of s. 28(iii). 6. Disallowance of certain expenses and treatment of certain incomes as revenue receipts in the assessment The AO has rejected the book results disclosed as per accounts resorting to the provisions of s. 145 of the IT Act for the following reasons: 1. The primary and proper evidence in support of the entries in the books of account have not been properly maintained and most of them were not even produced for verification. While payments have been made to various parties both through bank and in cash, the relevant details such as bank vouchers, bills in support of purchases, primary documents such as kitchen order token, money receipts, etc. could not be produced in support of all entries in the books of account. Only some of the cash vouchers were produced in evidence of cash outgoings but these did not cover the entire period of transaction. 2. No journal vouchers or journal registers have been maintained by the assessee even though the ledger account descriptions under all the heads repeatedly refer to journalized transactions. 3. From an examination of the accounts, even though the same are shown as audited, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 4.2, p. 4 of the appellate order. The reasons given by the learned CIT(A) to confirm the decision of the AO on this point may be summed up below: 1. Assessment records of the appellant clearly indicate that neither during the year under consideration nor in the earlier previous years, the appellant claimed the benefit of exemption of income for the purpose of taxation under the principle of mutuality. In the IT return form there is a specific space (Part V of return form) which an assessee claiming exemption of income must fill up. In the tax returns filed by the appellant club right from the asst. yr. 1994-95 it has never claimed any part of its income as exempt through Part V of the return form. 2. No record is maintained to ascertain the amount received from each member for various purposes. In respect of expenses also, member-wise accounts including expenditure vouchers are not available with the appellant. 3. Major activities of the club are bar and kitchen. In respect of these activities no records are maintained for individual members. Member-wise break-ups for receipts from guest-rooms and games are also not available.Salememos arising out of sales from kitchen, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above additions for the following reasons given in para 6.4 p. 6 of the appellate order: 1. Since the funds, whether under the head development fees or mutual benefit have come to the account books from the members by way of their contributions and are used not for the business of the club but for the development/construction of the club and benefit of the spouse of the members in case of member's death, such receipts cannot be regarded as revenue receipts. 2. The AO appearing before him on one of the dates of hearing i.e.14th March, 2001did not object to these submissions. 9. Reasons why the decision of the CIT(A) deleting the additions is not justified 1. It is now well-settled that in order to decide whether or not a receipt is a revenue receipt, its true nature and substance must be looked into. The classification of the receipt in the form of accounts is not of any importance in considering whether the receipt is taxable as revenue receipt. [Hoshiarpur Electric Supply Co. vs. CIT (1961) 41 ITR 608 (SC)]. It is the true nature and quality of the receipt, and not the head under which it is entered in the account books, Which would prove decisive. If the receipt is a tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be exempted for mutuality, Since the club was incurring loss and the losses were being computed, the consideration of mutuality does not arise. Otherwise also, if for any reason a mutuality is not claimed for one assessment year, it does not prevent or estop the appellant for a subsequent assessment year to claim it as the rule of res judicata do not apply. It is also not factually correct that the scrutiny assessment is for the first year. Such an assessment was done for the asst. yr. 1995-96 where the loss was accepted. This fact is capable to be tested from the records of the Department where it says that assessment for 1995-96 was assessed under s. 143(3) and accepted the loss. In this assessment year the entrance fee was treated as capital but not as revenue. 3. So far as the mutuality is concerned the appellant continues to maintain that it is a mutual concern and this fact can be verifiable from the books of account produced on which the learned AO on15th Feb., 2000says 'The books of account on various activities of the club are examined. Case is discussed'. Thereafter on22nd Feb., 2000,27th March, 2000and28th March, 2000, it is open for the AO to specific re-examinatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also a claim of mutuality. Matters mentioned in B-4 were about advertisement in souvenir collected from the members and no verification has been made earlier. 10. The statements made in paras C, D and E are materials now raised and they were also not factually correct. If the funds of the mutual organization are invested for earning interest, its character is not altered to result into non-mutuality. 11. An argument of no-mutuality is about Dreamers Festival. They do not relate to the year and in fact it was the club's programme where a group was invited to perform." 8. The learned counsel has also filed his reply to various issues raised by the authorities below which is reproduced below: "1. The claim of the assessee-appellant, a member's club, whose liability is limited by guarantee, incorporated under s. 26 of the Indian Companies Act, 1882, and subject to s. 27 of the said Act (presently correspond to ss. 25 and 26 respectively of the Companies Act, 1956) is that their surplus on the doctrine of mutuality is not income as defined under s. 2(45) of the IT Act. 2. The AO misunderstood this claim as a claim for exemption under s. 10 and denied it for the reason that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncern may trade with its members or not is yet not settled but the surplus arising is not income to be taxable. This can be so only if the statute taxes it. 4. The return need not be in cash, but by kind [in reducing the next years premium (Styles 2 Tax Cases 460 : Jones 11 Tax Cases 814] or by diverting the surplus (Ecentric Club). The principle of mutuality is extended to different institutions, such as voluntary social organisation. 5. The assessee is a 'members club', where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body. As part of the usual privileges, advantages and conveniences attached to the membership of the club, it extends various facilities to its members by way of (i) sale of food, refreshments, beverages (ii) letting out the guest-rooms and lawns (iii) games and sports like tennis, billiards, cards, swimming pool, etc. The amounts received by the assessee-club are by providing the above facilities, by way of entrance (admission) fees, periodical subscription from the members for various activities of the club. The facilities/se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e out a case on various grounds and dislodged the assessee-club's claim as a mutual concern, treating the receipts of entrance fees in the sum of Rs. 12,20,000, development fees in the sum of Rs. 6,63,375 and mutual benefit fund in the sum of Rs. 82,000 as income of the assessee-club. Further, the learned AO treated the receipts of Rs. 3,00,000 from ITC Ltd. as revenue receipt on an observation that rightfully the above receipt is not a receipt to construct a capital asset specifically but a receipt towards allowing ITC to use the club's prime display space for promotion of the ITC brand image. The learned AO found fault with the assessee-club in maintaining the books of account and other related documents and accordingly rejected the assessee-club's books of account under s. 145 of the IT Act and estimated the income. Consequently she computed the assessee-club's total income at Rs. 30,52,781 as against the net loss of Rs. 92,830 and bought the above income into the tax net. 8. In the assessee-club's appeal, the learned CIT(A) mostly agreed with the findings of learned AO on issues connected to the exclusion of the principles of mutuality, receipts from ITC Ltd. and the estimati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit, the money is simply collected from the members and held on their behalf, not in the character of shareholders but in the character of those who have paid for it. The excess that is realised from the members will be used for the benefit of the members in some form or other. (b) Claim in the form of return The claim of mutuality is a factual claim keeping in view the principle that no person can trade with himself. There is no specific provision in the IT Act for exempting the income of a mutual enterprise from the tax net. It is the judicial dictum which made the doctrine of mutuality operative on the mutual associations clubs. Therefore, the question of claiming the exemption of the assessee-club's income at Part V of the form of return does not arise. The learned AO's observations recorded at para 4 of p. 4 of the assessment order that 'in the returns filed by the assessee from asst. yr. 1994-95 onwards it has never claimed any part of its income as exempt in Part V of the return form' is improper, unjustified and devoid of any merit. The assessee-club is entitled to claim any deduction/exemption in course of the proceedings for assessment or in appeal, and so it has ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urant are not evidenced by money receipts. The credit sales/outstanding amounts listed daily in the kitchen sale register cannot be co-related with any particular memo/KOT so that it is not possible to verify which member availed the facilities for what amount, how much was received from him and/or outstanding in his name and the date on which the same was cleared up. In respect of the credit sales, the collections ostensibly made on a later date are not evidenced by money receipts or any other evidence indicating the identity of the payer. Similar procedure, as in case of the kitchen sales, is adopted in the two bars also where the primary evidence of each transaction i.e. the bar order token (BOT) does not contain details or identity of the person who has utilized the privileges or partaken of the facilities offered by the club. In fact, in the bar section even memos are not raised and the entire transactions are accounted for in an ad hoc manner by entering the total quantity consumption as per the BOT at the end of the day in the stock account. Likewise, in the entertainment activities also the receipts are fully on cash basis and no details are available for individual members ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creation services by the assessee-club to its members does not constitute the performance of specific services by the assessee-club for its members as categorised by the learned AO at the continuing para 3 of p. 6 continued as p. 7. The apex Court in the case of Bankipur Club Ltd. and many other Hon'ble High Courts have not held that providing the above facilities by a members' Club would constitute the performance of specific service. The words 'performing specific services' means, 'conferring particular and tangible benefits' on the members which otherwise would not be available to them as such except for payment received by the association in respect of those services-CIT vs. Calcutta Stock Exchange Association Ltd. (1959) 36 ITR 222 (SC). Specific services are performed by trade, professional or similar association but not by members' club. (g) On the facts and in the circumstances stated hereinabove, the assessee-club humbly submits that there can be no argument that a club which is incorporated as a company has a personality separate and distinct from the members and, therefore, sales of goods and services to the members will amount to business activity of the company wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To facilitate the members and their guests to dine at the site of the entertainment, the assessee club issued separate coupons (termed in the accounts as ticket sales) in place and instead of usual cash memo/bill. The bifurcation of the receipts reflected in entertainment account is given hereunder: (A) Sale of Food and Beverages Rs. Rs. 20-7-1996 4,844 30-8-1996 10,735 31-1-1997 35,560 51,139 (B) Sponsors Date Name Membership No. Rs. 21-9-1996 Cadet 5,000 17-12-1996 Super Sales Corporation 4,000 Sri V.K. Dhavan 28-12-1996 Alpic Finance Ltd. 10,000 30-12-1996 Aditya Steel L0295 5,000 (Sr. P.L. Kondoi, Mg. Dir. of the company is a life member) 30-12-1996 Sri R.S. Bhatia L0260 3,000 1-1-1997 ITC Ltd. COO11/01 25,000 1-2-1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative. The membership numbers of the members, as readily identified, have been mentioned, Therefore the entertainment account cannot be subjected to estimation of profit. A careful perusal of the 'net revenue account' for the year would show that the expenditure on electricity increased to Rs. 3,54,281.30 as compared to Rs. 1,78,088.80 in the financial year 1995-96. A comparison would further show that all other expenses are more or less equal to the preceding financial year 1995-96. Therefore the following findings of the learned AO are improper and unjustified: (i) Primary and proper evidence in support of entries in the books of account have not been properly maintained. (ii) Bank vouchers, bills in support of purchases, primary documents such as kitchen order tokens, money receipts etc. could not be produced in all the entries in the books of account. (iii) Only some of cash vouchers were produced in evidence of cash outgoings but these did not cover the entire period of transaction. (iv) No journal vouchers or journal registers have been maintained even though the ledger account descriptions under all the heads repeatedly refer to journalised transaction. (v) Fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment fund The assessee-club collects subscriptions from its members towards. mutual benefit fund and development fund every month by raising a common bill on each member. It maintains a separate personal ledger account of each category of the membership for the monthly dues/subscriptions receivable from individual member, permanent members, corporate members and outstation permanent members. At 8th line of the continuing para of p. 5 of the assessment order, it is clearly stated that 'it was verified that member-wise register has been maintained for such receipts only.' The CIT(A) has not committed any error in deleting the additions vide his order at para 6.4. 14. Re: Election to membership It is for the assessee-club to decide its primacy and priority as regards the grant of membership and any deviation does not destroy the mutuality. 15. The following cases apply to the assessee: (i) New York Life Insurance Co. vs. Styles (Surveyor of Taxes) (1889) 2 Tax Cases 460 (HL) (ii) Jones vs. South West Lanchashire Coal Owners' Association Ltd. (1926-27) 11 Tax Cases 814 (iii) CIT vs. Bar Council of Maharashtra (1981) 22 CTR (SC) 106 : (1981) 130 ITR 28 (SC) (iv) CIT vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... individual members for major All primary accounts details activities of the club, were produced and they were i.e., bar and kitchen. kept for long periods with Member-wise break-ups for the Revenue and without receipt from guest-room and giving opportunity to games are not available. clarify any doubts arising Sale memos arising out of out of the same, the Revenue sales from kitchen, chose to make above restaurant and bar do not sweeping/arbitrary statement. bear the names of the members of the club. 3. The club has hired out The club vests certain its open lawn, etc. in the inherent rights and names of members for holding privileges to its members large parties on the occasion and they have legitimate of weddings, other functions, right to hire out club lawns etc. Hundreds of users for holding parties or even including non-members who large parties on occasions partake the facilities of the as appropriate to the club including food catered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members and their guests. The Supreme Court of India held in the case of Bankipur Club Ltd., that where the "trade or activity is mutual, the fact that some members take advantage of the facilities which it (club) offers does not affect the mutuality of the enterprise". This has been cited by the same Supreme Court of India in the case of Chelmsford Club vs. CIT and the said Court endorsed the same in favour of the club. 4. AO cited that a function The Revenue's arbitrary was carried out on 4th March, depiction of the 'Dreamfest" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Chelmsford Club Ltd., wherein the apex Court clarified that there is clear identity between the contributors and the participators to the fund and the recipients thereof respectively based on when the question of the principle of mutuality could be tested with the following three conditions: (i) The identity of the contributors to the fund and the recipients from the fund; (ii) The treatment of the company, though incorporated as a club, as a mere entity for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... privileges for use of its members and their friends. The High Court, Patna summarised in the headnote (CIT vs. Ranchi Club Ltd. (1991) 100 CTR (Pat)(FB) 295 : (1992) 196 ITR 137 (Pat) (FB), Tax Cases 38 R. 576. "...that merely because the assessee company had entered into transactions with non-members and earned profits out of transactions held with them, its right to claim exemption on the principle of mutuality in respect of transactions held by it with its members was not los ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, during club's statutory auditors; the course of year. The instead learned AO estimated club is not a commercial the net profit by reducing entity seeking to jack up the expenditure at 10 per artificially any revenue cent of the gross receipts expenditure to camouflage any under the head of account taxable income. The club is i.e. entertainment and a mutual entity and its certain others. The learned expenditure is governed by CIT(A) agreed with the the requirements of its contention of the AO by members in the sphere of reasoning that the recreational, sports, games, receipts/expenses are not etc. Further, the co-relatable. Learned CIT(A) expenditure under various further confirmed the heads of account incurred disallowance of certain during the year under expenditure under certain assessment is true, duly heads by adducing that the audited by the statutory expenses are substantial, auditors and the said excessive, unreasonable, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO's arbitrary reduction of expenditure under "entertainment programmes" on the plea that the expenditure under the head was more than last year is not acceptable under any logic. Similarly, the learned CIT(A) grossly erred in confirming the disallowance of certain expenditure under the head "Card room, billiards, tennis and other games" on the plea that they are substantial, excessive, unreasonable, disproportionate, claimed for the first time and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in the cases of CIT vs. fund of the club. In fact, United Club (1986) 52 CTR entrance fee vests in the (Pat) 279 : (1986) 161 ITR contributor the right of 853 (Pat) and Madras Race membership of the club and Club vs. CIT (1994) 210 assumes the nature of a ITR 680 (Mad), respectively. capital receipt in the hands In support of his judgment, of the assessee-club since the learned CIT(A) cited the club's articles of that "the articles of association do not provide association of the club for capital base of the club. nowhere lay that the entry The treatment of receipts fee collected from the like entrance fees as revenue members shall be the receipt as professed by the capital fund of the club learned CIT(A) proves specie and refundable to the of his prejudicial mind members as such when the towards the appellant's case, membership ceases." He since such contrived maintained that the entry interpretation of the learned fee colle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (and not revenue account). Hence, entrance fees are classified as general fund for accounts purposes, under the funds and liabilities of the club by the chartered accountants, instead of revenue account under P L a/c. It may be stated that even if the CIT(A)'s vain attempt for compounding capital account receipts under entrance fees paid by members with the receipts under revenue account, the taxability of such surplus created out of excess receipts over expenditure-as a result of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to either transfer the entrance fee or refund the same and when the member ceases to be member. As stated above, the entrance fees are capitalised under a common fund ("general fund"), which is used for creating assets for use of the members, apart from using the general fund for netting out the club's revenue losses or revenue surpluses, as the case may be, each year. Regarding the Revenue's comment that "entry fee collected from members and used for provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he national advisory committee on accounting standards as well as norms and standards prescribed and practised by the ICAI. According to the standard norms and practices, the accounts of the club are computed and audited and certified by the statutory auditors with their audit report and the same is adopted and accepted by the annual general meeting of the club as per the provisions of the Companies Act. When the above process of accounting/ auditing/reporting/adopting of the accounts un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated in s. 115J that the "income of the company as accepted by the AO". Although the apex Court's ruling relates to the issues pertaining to assessment of income with reference to s. 115J of the IT Act, the merit of the apex Court's judgment is aptly applicable to the present case of the club and the AO per se has no jurisdiction to alter the audited/certified accounts and adopted by the members of the club in the annual general meeting, with a prejudicial motive for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course to refunds to members, thereby causing a threat to the existence of the entry of the mutual club. 8. Learned CIT(A) confirmed The contention of learned the receipt of Rs. 3,00,000 CIT(A) in equating hoardings from ITC Ltd., received by and advertisements displayed the club towards construction on the notice board with of Wills Pub (and not the that of the capital asset whole of it) is in the nature like Wills Pub is rather of revenue receipt and not irrational and bereft of capital receipt by reason judicial prudence. The that the nature of money capital expenditure received for advertisement construction of Wills Pub as as is the case with other per the request of the ITC advertisements by way of Ltd. was far more than Rs. display on the notice board 3 lakhs as funded by the of the club or hoardings is sponsorer and the balance a revenue rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset for the club. 9. Club's KOTs/BOTs do not The learned CIT(A) is wrong bear the membership number or in his statement. KOTs/BOTs the name of the member; on a do bear the provision of given date the amount is space earmarked for the name debited or collected from a and number of the member. member does not correspond The member writes his name to entry in, the counter/ and number in the earmarked guest register. space and accordingly the amount is debited or collected from respective members with corresponding entry made in the respective registers for enabling billing to the respective members. Even on assumption that the KOTs/BOTs do not bear the membership number and name of memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called for certain specific application forms with a mala fide intention where he had vested interests instead of anything to do with the adjudication proceedings. The comments and assumptions of the CIT{A) in the matter are uncalled for and have no relevance to the contentions issue. However, the details of receipt and processing of application forms received from applicants as called for by the learned CIT(A) were furnished. Mention may be made that the admission of members is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing of applications for membership is an internal matter of the club and it has no relevance to the proceedings of the appeal for "reinforcing the finding" of the appellate authority. Incidentally, the information called for processing of applications for admission of members by learned CIT(A) is neither central to the issue under appeal nor to the aspect of the taxability of the club, in general. The findings of the learned CIT(A) exhibit his preconceived prejudicial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a common fund for engaging themselves for common benefit to themselves, then any surplus returned to them cannot be regarded in any sense as profit. Where the activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities, which it offers, does not affect the mutuality enterprise. The surplus-excess of receipts over expenditure-as a result of mutual arrangement, cannot be said to be 'income' for the purpose of IT Act. According to the articles of association of the club, the membership of the club vests the inherent right in the members for certain the privileges which includes bringing of guests authorised for the occasion to partake in the club facilities along with the host members and it does not amount to violation of the principle of mutuality so long as such services are paid for by the host members and not by the guests. It is a settled law that 'merely because the club even if entered into transactions with non-members and earned profits out of such transactions, the club's right to claim exemption on the principle of mutuality in respect of such transactions held by it with its members is not lost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services made to host-members along with their guests, cannot be regarded as an income for the fact that the so-called surplus flows into the common fund (general fund) only to subserve the interest of the members for furthering, the common amenities of the club. Hence such surplus is not exigible to income-tax at any rate." 11. We have heard both the sides at length and considered the written submissions from both the sides, its replies and comments by the assessee. We, have gone through carefully the entire materials placed on record. We have also perused the order of the Hon'ble Supreme Court in the case of Bankipur Club Ltd. on which both the sides have placed reliance. On careful consideration of the AO's order we find that the AO has proceeded to disallow the claim of mutuality i.e. the club is a mutual concern on the basis of following reasons: (i) The assessee-club has claimed its income exempt in the concept of mutuality for the first time; never before such claim was made. (ii) Secondly, assessee-club has not maintained its books of account properly. (iii) Thirdly, that the facility of Bhubaneswar Club was not restricted only to the members but non-members and out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enabling the members to conduct a social club, the objects of 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 cultural activities cannot be considered to trade for profit so as to make its surplus taxable in law when it overcharges 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." The above principle of mutuality was taken into consideration by the Hon'ble Patna High Court (FB) while deciding the case of CIT vs. Ranchi Club Ltd. (1991) 100 CTR (Pat)(FB) 295 : (1992) 196 ITR 137 (Pat)(FB). Keeping in view the above observations of Hon'ble Andhra Pradesh High Court and the observations of the Hon'ble Supreme Court in the case of Bankipur Club Ltd., we shall proceed to decide the issue before us. 11.1, The first ground taken by the AO to deny the claim of the assessee was that such claim was never made before. We find that this observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ranchi Club Ltd. Cricket Club ofIndiaand Northern India Motion Picture Association. The question referred to Hon'ble High Court in the case of Ranchi Club Ltd. was as under: (i) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the assessee-club is a 'mutual concern'? (ii) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from its house property let to its members and their guests is not chargeable to tax? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from sale of liquor, etc., to its members and their guests is not taxable in its hands? A perusal of the above questions referred to Hon'ble Patna High Court (FB) will show that the second and third questions are the same which are involved in the present case and these questions have been answered by Hon'ble High Court in favour of the assessee and the same has been endorsed by the Hon'ble Supreme Court. Thus, it is quite clear that when the Hon'ble Supreme Court decided the case it Was vary much aware th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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