1980 (2) TMI 26 - HC - Income Tax

Summary

Issues Involved:
1. Taxability of income received from renting out rooms to members of a club.
2. Application of the principle of mutuality.
3. Relevance of incorporation in determining tax liability.
4. Distinction between commercial and non-commercial activities of a club.

Summary:

1. Taxability of Income Received from Renting Out Rooms to Members of a Club:
The primary issue was whether the sum of Rs. 4,305 received by the assessee, a public limited company running a club, from renting out rooms to its members is chargeable to income-tax. The ITO treated this as income from house property and brought it to tax. The AAC upheld this decision, and the Tribunal confirmed it, rejecting the assessee's contention that the receipts were a result of mutual association and not taxable income.

2. Application of the Principle of Mutuality:
The principle of mutuality, which states that "no one can make a profit out of himself," was central to the assessee's argument. The Supreme Court's decision in CIT v. Royal Western India Turf Club [1953] 24 ITR 551 was cited, where it was held that there was no mutual dealing between members inter se, and the income from business dealings with members was taxable. However, the court distinguished this case by noting that the assessee did not engage in any trade or business and the surplus was incidental to mutual activities.

3. Relevance of Incorporation in Determining Tax Liability:
The court noted that incorporation does not automatically authorize the charge to tax of the surplus arising to a club. The Supreme Court in CIT v. Royal Western India Turf Club [1953] 24 ITR 551 stated that incorporation does not prevent a company from making a profit out of its own members, but this profit must be from business activities. In this case, the assessee was not engaged in any business but was organizing social activities for its members.

4. Distinction Between Commercial and Non-Commercial Activities of a Club:
The court emphasized that the assessee was not indulging in any commercial activity designed to make a profit. The rooms were provided as an amenity to members, and any surplus was not distributed as dividends or bonuses but was incidental to mutual activities. The court referenced CIT v. Madras Race Club [1976] 105 ITR 433, where it was held that surplus from members' subscriptions was taxable if the club engaged in business activities. However, in this case, the club's activities were purely social and non-commercial.

Conclusion:
The court concluded that the sum of Rs. 4,305 received by the assessee from renting out rooms to its members was not chargeable to income-tax. The principle of mutuality applied as the club was not engaged in any business activity, and any surplus was incidental to mutual activities. The question was answered in the negative and in favor of the assessee, with costs awarded to the assessee.