TMI Blog1991 (9) TMI 52X X X X Extracts X X X X X X X X Extracts X X X X ..... e, Ranchi Club Limited, is a company incorporated under the Indian Companies Act, 1913. It is limited by guarantee. The memorandum of association of the assessee discloses that its main object is to provide a club house and other conveniences and accommodation for the use of its members and their friends. Clauses (4) and (5) of the memorandum are material for the determination of the issues involved since these provide for the contribution of the members to the common fund of the club, guarantee towards debts and liabilities and upon winding up, their participation in the surplus. The said clauses read as under : "4. Every member of the company undertakes to contribute to the assets of the company, in the event of the same being wound up during the time he is a member or within one year afterwards for payment of the debts and liabilities of the company contracted before the time at which he ceases to be a member, and of the costs, charges and expenses of winding up the same, and for the adjustments of the rights of the contributories amongst themselves such amounts as may be required not exceeding Rs. 50. 5. If, upon the winding up or dissolution of the club, there remains, aft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e liable to be taken into account for computation of the taxable income under the Act. While coming to the said conclusion, it was observed by Uday Sinha J. (at page 123) : "I find that, in accordance with the articles of association, only permanent members were the members of the club. The rest, namely, temporary members, lady members and honorary members enjoyed the privileges on sufferance. The members of the club of Jamshedpur were entitled as of right to avail of the facilities. The premises were let out on hire to Rotary Club and Lions Club. The guest room could be utilised by non-members as well, who would pay for them. Thus, the contributors were not only members but non-members as well. Thus, on these facts, it is difficult to hold that there was mutuality amongst the members and the club." The submissions made on behalf of the assessee that the income from non-members alone can be treated as subject to tax leaving out the income from sale to members was also rejected on the premise that once there is want of complete identity between the contributors and participators, the principle of mutuality is lost. Subsequently, when the present case came up for consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enjoyment of club facilities by the temporary members on sufferance has destroyed the applicability of the mutuality principle even in respect of the receipts from permanent members. Section 4 is the charging section under the Act. It provides that "where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, the income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions of, this Act in respect of the total income of the previous year or previous years, as the case may be, of every person." A reading of the aforesaid charging section clearly shows that every person is liable to pay tax on its income as envisaged under the Act. The words "income" and "person" have been respectively defined in clauses (24) and (31) of section 2 of the Act. Every company and association of persons, undisputedly, fall within the ambit of the expression "person". Therefore, the assessee, either as a company or as an association of persons, is a legal entity liable to tax under the Act. The Act does not envisage any exemption in its favour. The second question which arises is whether the receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity for the purpose 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 result in surplus. The participation of the members in the surplus must be in their character as contributors to the common fund or as consumers, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in both mutual activities as well as non-mutual activities then whether it can still claim exemption with respect to the receipts relating to the mutual activities or whether its claim of exemption from tax under the Act is completely destroyed. In the case of CIT v. Madras Race Club [1976] 105 ITR 433 (Mad), it has been observed that the application of the principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character.". The principle of mutuality can, in such cases, be confined to transactions with members. The two activities can, in appropriate cases, be separated and the profits derived from non-members can be brought to tax. In Carlisle and Silloth Golf Club v. Smith [1912] 6 TC 48 (KB),"the golf club in question which was admittedly bona fide members' club was bound, under a clause in its lease, to admit non-members to play on its course on payment of green fees to be fixed by the lessors but not to be below a minimum fixed in the lease. It was held that the club, for the purpose of income-tax, was carrying on a concern or business which was capable of being isolated and defined and in respect of which it received remuneration which ..... X X X X Extracts X X X X X X X X Extracts X X X X
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