TMI Blog1984 (1) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... lasses of members, viz., (1) permanent, (2) temporary, and (3) honorary. The latter two classes of members are also entitled to the same privileges which the permanent members are entitled to except that they can neither vote nor can be elected nor be co-opted to any committee. It has a set of rooms fully furnished which are let out to the members. It provides refreshments and meals to the members and their guests. It has also a bar where drinks are supplied to the members and their guests. The club charges for refreshments, meals and drinks supplied and also charges rent for the rooms. Before the ITO, the case of the assessee was that the club was mutual concern and the surplus accruing to it could not be regarded as income. It was further urged that there could not be any difference between the permanent and the temporary members as all the members enjoyed the same benefits and were contributors and participators. The ITO was of the view that if some of the contributors to the funds were not participators in the surplus or if some of the participators in the surplus were not contributors to the common fund, the profit of the association would be assessable to tax. He found that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the temporary and honorary members were not trade transactions and no income arose from such transactions in order to tax the same. It was further held that even the income from providing lodging to temporary, permanent and honorary members could not be treated as commercial transaction and no income from such receipts could be treated as income from property. It was also held that the charges for lodging were in no way different from the charges recovered for the supplies of refreshments and meals to the members. The dealings by the club being exclusively with the members, the receipts for lodging also could not be treated as income falling either under the head " Other sources " or "Income from property". The Tribunal further held that the income from the receipts both from lodging as well as messing, bar, etc., from the permanent, temporary and honorary members could not be assessed to tax. The Tribunal was of the view that the charges for lodging were in no way different in character from the charges for supply of meals and other refreshments. This case has now come up before us on reference at the instance of the Revenue. Although the points of law raised in this case are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nother person and, in the eye of law, it is earning profit just as an ordinary tradesman by selling goods to his customers makes profits. The principles laid down in the decided cases may be briefly stated. A group of persons can form a club to provide some facilities to themselves and any excess payment for these facilities may be retained for future use. In this process, no profit is made. When these persons form themselves into a company and arrange their affairs in such a way that the company makes profit for and on behalf of the members, it has got distinct and separate personality from the members in the eye of law, but the members are using the company and the corporate personality for obtaining goods and services. The surplus that the company gets is held on behalf of the members and for future use of the members. The members may get it back either in the shape of reduction of price or extension of facilities that are to be provided to the members in future. The important point is that the company is not acting as a business concern or a trading company on its own for the purpose of making gain. The company is being used by the members for the purpose of obtaining goods a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of insuring their lives, members of an incorporated company. But the company (so far as regards the participating policyholders) was not formed for the purpose of carrying on a business having for its object the acquisition of gain... The fact, therefore, that the insured, who are also the insurers, carry on their business through the medium of a company was properly treated as immaterial. It appears to me that the reasoning which commended itself to those distinguished jurists in the New York Life's case [1889] 14 App. Cas 381 (HL) applicable as it is to genuine mutual concerns and to no others, applies to the present case, and disposes of the contention now under discussion. Lord Cave also in that judgment pointed out that the surplus fund of the company, sooner or later, in meal or in malt, must go back to the policyholders as a class, though not precisely in the proportions in which they had contributed to them and the association did not in any true sense make a profit out of their contributions. Mr. Bagchi has referred to the memorandum of association and has argued that the company was formed for the purpose of doing business. This argument also does not carry the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the club will be retained for the benefit of the members as a class. In the case of United Services Club v. Emperor, AIR 1921 Lahore 208, Martineau J. held that the money received by a club from its members could not be properly regarded as its " income ". The fact that the club was incorporated as a company did not make any difference. This point came up very recently for consideration in the case of CIT v. Bankipur Club Ltd. [1981] 129 ITR 787 (Pat). In that case, the club had permanent, temporary as well as ordinary members. The question was whether the club which was formed for social intercourse and for either recreation or for cultural activities could be considered to trade for profit so as to make its surplus taxable in law when it overcharged its members for the supply of refreshments, beverages or drinks. A Division Bench of the Patna High Court held there could not be any profit so far as the transaction of sale of drinks was concerned. The club was owned by the members and so the transaction would amount to a sale by the members to themselves. All the members were entitled to participate in this privilege and the income arising therefrom was applied for repurchasin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Styles' case (2 TC 460) in the following words: " 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 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 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 givin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s also without any substance. When the club provides accommodation to its members, it provides bed, light and many other facilities. The members enjoy the facilities not as tenants but as members of the club. It cannot be said that the members are paying rent and have, therefore, become tenants of the club during their stay. What is supplied by the club to the members is a composite of many things. Under s. 22 of the I.T. Act, income from house property is liable to be taxed. The income that the club has made in this case is not from letting out of the rooms. The income is derived from providing many facilities to the members including accommodation. Neither the club nor the members have treated these facilities separately and the Department cannot also treat them separately by splitting up the facilities under various heads. Apart from this, the basic difficulty in the way of the Income-tax Department is that the facilities including accommodation were provided by the club as agent of the members and not as owner of the house property. The members have provided for themselves these facilities through the instrumentality or agency of the club. The club was not the landlord and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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