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TMI Blog1971 (9) TMI 59X X X X Extracts X X X X X X X X Extracts X X X X ..... n for the officers and ratings of vessels of the merchant navies of the world. Three classes of members are contemplated under the constitution of the club. They are : (1) sea going officers and ratings of all vessels of the merchant navies visiting Visakhapatnam ; this class of members do not pay any subscriptions ; (2) executive members of the staff of the steamship agencies carrying on business in Visakhapatnam and members of the gazetted marine staff of Visakhapatnam Port, and marine surveyors at Visakhapatnam Port ; this class of members pay Rs. 15 or Rs. 10 as annual subscription ; and (3) such persons as having close connection with the sea borne trade of Visakhapatnam, who in the opinion of the committee justify their being accepted as members and likewise such officers of the Indian Navy as shall on application be approved by the committee ; this class of members pay no subscription at all and shall have no voting rights. The committee has also power to invite the companies of visiting warships of any nationality to be special honorary members. This class of members also do not pay any subscription. In pursuance of one of its objects to provide recreation for the officers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistant Commissioner accepted the said contention of the assessee and held that the surplus of receipts over expenditure was exempt from payment of tax. Aggrieved by the order of the Appellate Assistant Commissioner, the Income-tax Officer went up in appeal to the Income-tax Appellate Tribunal. Before the Tribunal it was contended that, (i) the members who enjoyed the amenities were not only indeterminate but also did not pay any subscription ; (ii) the club was a trade association within the meaning of section 10(6) of the Act ; and (iii) there was no mutuality between the contributors and the participators. The Tribunal rejected those contentions and held that the members of the club, at any given point of time, were well defined. The fact that some members did not pay any subscription did not detract from the genuineness of their membership. The amenities were provided by the club only to the members of the club and the income derived was only from the members of the club. The assessee was not a trade association but a social club inasmuch as all the members, whether they paid any subscription or not, paid for the amenities they enjoyed. There was a complete identity between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which is the source of the receipt and proceed on what they regard as substance of the matter. In support of the above argument the learned counsel relied upon the decisions in Commissioner of Income-tax v. Kumbakonam Mutual Benefit Fund Ltd., Joint Commercial Tax Officer v. Young Men's Indian Association, Commissioner of Income-tax v. B. M. Kharwar, and Pamulapati Buchi Naidu College Committee v. Government of Andhra Pradesh. Sri M. J. Swamy, the learned counsel appearing for the assessee, contended that the stand taken by the department before the income-tax authorities and the Tribunal was that there was a sale by the paying members to the non-paying members. The department cannot be permitted now to change its stand that the sale is by the society as an entity to its members. When the constitution of the club permits the admission of two kinds of members paying and non-paying it cannot be said that the non-paying members are not genuine members. Neither the income-tax authorities nor the Tribunal has given a finding that the non-paying members are not genuine members. It cannot now be contended on behalf of the revenue that non-paying members are not genuine members. It is i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessable. In paragraph 79, at page 36, in Gunn's Commonwealth Income Tax Law and Practice, the law as prevailing in the Commonwealth is succinctly stated thus : " So long as the ownership of the surplus is restricted to those who provided it as a class it is not assessable, and it is immaterial that it is not immediately distributed to its members, but is held in reserve, or that it is not distributed in precisely the proportions in which the members contributed to the surplus. Where the parties are not identical, or the surplus is distributed among persons other than in their character of persons subscribing the surplus, i.e., as shareholders receiving a dividend or as debenture-holders deriving interest, the profit is assessable. " Tracing the origin and the development of law in this behalf, Wheatcroft in his book on the Law of Income Tax, Surtax and Profits Tax, in paragraph 1-417 at pages 1200 and 1201 stated thus : " In several early cases there were dicta to the effect that a man could not make a profit by trading with himself ; this developed into the proposition that when persons contribute to a common fund in pursuance of a scheme for their mutual benefit having no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al such a plea has been raised. Therefore, the revenue is competent and entitled to raise such a plea on facts which are on record. The paying members contribute to the common fund of the club by paying subscriptions. They also contribute to the club by paying something extra over the cost for the amenities they receive from the club. Similarly, the non-paying members also contribute to the club by paying something extra over the prices of those amenities provided them by the club. It is, therefore, not correct to say that non-paying members do not contribute to the common fund of the club. On the facts it is evident that both paying members as well as non-paying members as a class contribute to the common fund of the club. It is an admitted fact that the supplies of the refreshments, beverages, etc., are made and services rendered by the club only to its members and not to any outside body and that those amenities are provided or services rendered to the members only on payment. The cardinal requirement for mutuality has been laid down by Lord Macmillan in Municipal Mutual Insurance Ltd. v. Hills thus : " ...... all the contributors to the common fund must be entitled to parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nam Mutual Benefit Fund Ltd., being incorporated under the Companies Act, was a company, limited by shares. It carries on banking business restricted to its shareholders. The shareholders are entitled to participate in the various recurring deposit schemes of the assessee or to obtain loans on security. Recurring deposits are obtained from members for fixed amounts to be contributed monthly by them for a fixed number of months as stipulated at the end of which a fixed amount is returned to them according to published tables. The amounts so returned will cover the compound interest of the period. These recurring deposits constitute the main source of funds of the assessee for advancing loans. Such loans are restricted only to members, who have, however, to offer substantial security therefore, by way of either the paid up value of their recurring deposits, if any, or immovable properties within the Tanjore district. Out of the interest realised by the assessee on the loans, which constitutes its main income, interest on the recurring deposits aforesaid are paid as also all the other outgoings and expenses of management and the balance is dividend among the members pro rata according ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s subscribe for their mutual benefit, and I do not think that the money received by a club from the members composing it can be properly regarded as 'income', a word which itself seems to imply something received from outside. " In Commissioners of Inland Revenue v. Eccentric Club Ltd. the facts were that the assessee, the Eccentric Club Ltd., was a company incorporated under the Companies Act. It was promoted for social intercourse amongst gentlemen connected with literature, art, music, drama, etc., and to buy, prepare, supply, sell and deal in all kinds of provisions and refreshments required or used by the members of the club or others frequenting the club. Every member of the company undertakes to contribute to the assets of the company in the event of its being wound up. The income and property of the club shall be applied towards the promotion of the objects of the club and no member of the club in his character as member shall be entitled to receive, directly or indirectly, any dividend, bonus or other profit out of the income or property of the club. The property of the club on its winding up would be applied in accordance with the company's articles of association. The p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1860, once the society is registered with the Registrar, by the filing of the memorandum and certified copy of the rules and regulations and the Registrar has certified that the society is registered under the Act, it enjoys the status of a legal entity apart from the members constituting the same and is capable of suing or being sued. But the members of the society or the members of the governing body do not have any proprietary or beneficial interest in the property the society holds. It follows that upon its dissolution, they cannot claim any interest in the property of the dissolved society. The Societies Registration Act, therefore, does not create in the members of the registered society any interest other than that of bare trustees. What all the members are entitled to do, is the right of management of the properties of the society subject to certain conditions. " In the following two cases it has been held that, supply of refreshments, drinks, etc., by a social and recreational club to its members which is not conducted for profit or gain cannot be regarded as a sale by a dealer. In Joint Commercial Tax Officer v. Young Men's Indian Association the Supreme Court obs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e an assessable profit. If 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 it should not have dealings with an outside body which results in Surplus. The particip ..... X X X X Extracts X X X X X X X X Extracts X X X X
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