TMI Blog1979 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... ommittee. During the assessment years in question the entrance fees for life members, was Rs. 2,500 and the entrance fee for ordinary members, was Rs. 500. An ordinary member can become a life member on payment of fees prescribed for life members after deducting the amount which he has paid by way of entrance fees as an ordinary member. An ordinary member has to pay an annual subscription in advance on election and on, the 1st day of April in each year thereafter. Life members, service members and temporary members are, however, not liable to pay any annual subscription under art. 38. Under the articles, temporary, honorary, service and associate members are subject to the memorandum and articles of association and the rules and bye-laws of the club for the time being in force, but they are not entitled to receive notice of or to attend or to vote at the general meeting of the club or to be elected members of the Executive Committee of the club or of any sub-committee of the club or to stand for election or to hold any office of the club or to participate in the distribution of any assets of the club. Generally, the rights of the life members and the ordinary members, so far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had treated the entrance fees received from both ordinary members and life members as being on capital, account and had treated the entire amount as general reserves. It was also argued on behalf of the assessee that the I.T. authorities were not entitled to bifurcate the entrance fees into Rs. 2,000 as life membership fee and Rs. 500 as entrance fee. The Tribunal in its order observed that though the argument advanced on behalf of the revenue that entrance fees paid by the life members constituted a consolidated amount in lieu of recurring annual subscriptions was, possible, the argument could not be accepted on closer scrutiny. The Tribunal, however, took the view that the amenities and facilities provided by the club were not related to the particular payment made by the member because, according to the Tribunal, neither the honorary members nor the temporary and service members had to pay any entrance fees and temporary and service members had to pay only local subscription. The Tribunal introduced a concept of hierarchy of member, ship and, according to the Tribunal, the whole scheme of the articles and the bye-laws was to create a hierarchy of membership and the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contend that the club was erroneously treated as a trading company and that the assessee-club was really an association for mutual advantage of the members of the club and there was, therefore, no question of the club carrying on any trading activity when the facilities were made available by the club, to its own members. It was urged that the name "life member " is itself indicative of a status and, according to Mr. Colah, the I.T. authorities have not disclosed any basis for compounding or computation of the annual payments and there was, therefore, no justification, according to the learned counsel, for splitting up the amount of entrance fees made by a life member. It is urged that such an attempt to split up this consolidated payment of Rs. 2,500 into two figures, namely, Rs. 500 by way of entrance fees and Rs. 2,000 by way of a consolidation of the amount of annual subscription would really amount to rewriting the constitution and the bye-laws of the assessee. Alternatively, it was contended that if at all it was found that it would be permissible to split up the amount paid by way of entrance fees by a life member, then the entrance fees equivalent to the amount of Rs. 500 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and distinguished persons as its members and that is the sole consideration for electing person as an honorary member. Life members, service members and temporary members are not liable to pay any Annual subscription and the liability to pay annual subscription is only on the ordinary members. In addition to the annual subscription, the ordinary members, who are ordinarily resident within the local area, have to pay annually, in advance, local subscription of such amount as may from time to time be determined by the executive committee. The temporary members, service members and associate members form, by the very nature of the incidents of their membership, an independent class of persons who are not entitled to take part in the management of the club though, in other respects, all of them are entitled to enjoy the same privileges as other members. Their membership is entirely of a temporary nature and its duration is controlled by the appropriate articles. They cannot, therefore, be compared with either life members or ordinary members. If a person wants to avail of the facilities afforded by a club and exercise the rights which are available to an ordinary member, he has to pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree of any cost and it appears obvious to us that the entrance fees includes within it a compounded payment in lieu of the annual subscription which a member would have been required to pay as an ordinary member. We have, therefore, no doubt in our mind that in the case of life members when the entrance fee is paid, it is a consolidated amount, part of which must be treated as entrance fees and part of it as a compounded payment in lieu of, the recurring payments to be made annually in the nature of annual subscriptions. When the amount paid by a life member, which is styled as entrance, fee, is so split, it will not be correct to say that this would result in rewriting the constitution or articles of association of the assessee. As already pointed out, the real question which has to be determined, is the nature of the receipt in the hands of the assessee and if a discussion of the nature of the receipt is not foreclosed by any nomenclature adopted by the assessee, it would be perfectly open to the I.T. authorities to scrutinise the nature of the receipt and to classify it as either capital receipt or a revenue receipt or partly of one kind and partly of another. Mr. Colah has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which would go to show that such payment was in the nature of income and not on capital account. Relying on these authorities it was vehemently contended by Mr. Colah that the amount of entrance fees paid by a life member must be treated on the same footing as salami. Now, there can be no doubt that the ratio of none of these decisions is directly applicable to the instant case so far as the question of determining as to whether the receipt of the entrance fees from life members should be treated as a capital receipt in the hands of the assessee, is concerned. Payment of a premium, or salami as it is often called, is a concept peculiar to a transfer of leasehold right in respect of immovable property. It is single payment made by the lessee for an acquisition of the right to enjoy the benefits granted by the lease. That concept, therefore, cannot in terms be imported in a matter like the present one where we have to consider the nature of the payment and the nature of the receipt in the hands of the assessee in the context of the rights and benefits available to a member of a club the functioning of which is regulated by its articles of association and the bye-laws. As we have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by a life member is held to be a compounded payment for annual subscriptions, there is no difficulty in holding that that part of it would be income in the hands of the assessee. So far as the remaining amount is concerned, it would be in the nature of a capital receipt of the assessee. What is, however, argued by Mr. Joshi on behalf of the revenue is that even that part of the consolidated amount of entrance fees which could be classified as entrance fees should be treated as income. We must first decide what part of the entrance fees paid by a life member should be treated as a capital receipt. Now, so far as the year in question is concerned, the entrance fees for an ordinary member prevalent was Rs. 500. It would, therefore, be reasonable, while dissecting the consolidated entrance fees of Rs. 2,500 into entrance fee as such and a commuted payment on account of annual subscription, to treat Rs. 500 out of Rs. 2,500 as entrance fees and the rest of it is in the nature of a consolidated payment by way of annual subscriptions and, therefore, as income. With regard to this entrance fee of Rs. 500 it is contended that this must also be treated as income in the hands of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the club is return for vesting a right of membership in the member and, therefore, in our view, the entrance fee would clearly be in the nature of a capital receipt in the hands of the assessee. Mr. Joshi has heavily relied on the decision in Liverpool Corn Trade Association Ltd. v. Monks [1926] 10 TC 442 (KB).. The question there was whether the Liverpool Corn Trade Association Ltd. was a mutual association or was a trading company. The association, which was a limited company under the Companies Act, was formed for the purpose of protecting the interests of the corn trade and for providing a clearing house, market an exchange and arbitration and other facilities for the persons engaged in that trade. Membership of the association was confined to persons engaged in the corn trade as principals. Each member had to acquire one share (of pound 150 nominal value) in the company and had to pay an entrance fee and an annual subscription. Non-members could also become subscribers. Payments were made to the association by members and others for services rendered through the clearing house, etc. The association had the power to declare a dividend out of its profits, though it had no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the main question which fell for determination before Rowlatt J. was whether the association in question was a mutual association or it was a trading company and the question was whether the profits obtained as a result of dealings between the corporation and its members should be regarded as profits as such. The decision seems to have proceeded on the footing that the association may profit from receiving the entrance fee and the sub, scription for the various facilities as will be clear from the manner in which the case has been approached in the following paragraph (p. 452) " Now, the question is here, whether, so far as this company makes profit out of what the members pay to it, that is taxable income of the business which they undoubtedly carry on. That alleged profit consists of the amount by which the entrance fees of the members and, their sub, scriptions for the various facilities, if I may use that general word, exceed the amount which is to be taken to be the cost of keeping up the buildings and affording the facilities." The judgment in Liverpool Corn Trade Association's case [1926] 10 TC 442 (KB) does not indicate that it was ever disputed in that case th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition to the payment of the entrance fees pay the annual and/or local subscription payable by an ordinary member as provided for in bye-law 19. (b) Widows of patrons, vice-patrons, founder and life members who have attained the age of 18 years at the date of the death of the member and are received in general society are eligible for admission to life membership of the club-in their own right on payment of an entrance fee of Rs. 500 payable in one instalment... They shall not be liable to pay any annual, local or monthly subscription." According to the above article, the widow of a patron, vice-patron, founder or ordinary member could become an ordinary member, in which case she paid an entrance fee of Rs. 150. A widow of a patron, vice-patron, founder or life member could alone become a life member, in which case she had to pay an entrance fee of Rs. 500. If the widow became an ordinary member, she was required to pay annual and/or local subscription, as the case may be. However, in the case of a life member, she was not liable to pay any annual, local or monthly subscription. It appears that the old articles of association were replaced by the new articles of association a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ready paid the annual subscriptions in a lump sum, a concession might have been given to the widow of such a life member and she is relieved of the recurring liability to pay any other subscription year after year if she paid a lump sum amount of Rs. 500, a part of which must obviously be treated as entrance fees. This amount would be the same as the normal entrance fee payable by a widow for becoming an ordinary member. Therefore, even in the case of a widow of a life member, the amount of Rs. 500 paid by her by way of entrance fee is liable to be dissected and out of this amount Rs. 150 must be treated as a capital receipt and the balance of Rs. 350 must be treated as the income of the assessee. Accordingly, the question referred to us is answered as follows: In respect of the assessment years 1963-64 and 1964-65, out of the amounts received on account of entrance fee from life members, Rs. 500 should be treated as a capital receipt and the balance of Rs. 2,000 should be treated as the income of the assessee. In case an ordinary member becomes a life member on payment of Rs. 2,000, the entire amount of Rs. 2,000 should be treated as the income of the assessee. In case the wid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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