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TMI Blog2009 (9) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. We now proceed to answer the questions of law as framed. 3. Minimal factual matrix, that is required for this purpose is recapitulated in the first instance, as under: The respondent/assessee is a society registered under the Societies Registration Act, 1860. It has been formed at behest of the Government of India to improve the performance of public enterprises and to improve its total role in conveying such information and advice to community and the Government and to general help public enterprises and other member organizations in their respective views. The membership of society is open to all public enterprises of Central/State Government. The objects of the society as stated in the Memorandum and Articles of Association are reproduced below for ready reference: i) "To adjust and/or settle controversies between members of the society. If called upon by the parties to do so or when reference is made by them to the society; ii) To convene and hold conference and organize seminars on matters pertaining to or connected with industry business, trade, national economy, public enterprises and matter incidentally thereto; iii) To undertake sponsor or arrange training pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the time of the dissolution and in default thereof by a competent Court of law, as may have the jurisdiction in the matter." 4. The assessee has its building at Lodhi Road, New Delhi. Its income is mainly from interest from deposits with bank, rent from use of the convention centre and from letting out of the part of the premises of the aforesaid building as well as subscriptions received from the members. 5. The assessee had claimed the entire income exempt from tax on the 'principle of mutuality'. This claim of the assessee was accepted in the original assessment for the year 1999-2000, with which we are concerned in the present appeal. However, while making assessment for the Assessment Year 2003-04, the Assessing Officer came to the conclusion that the interest income, the receipt from convention centre for use by non-members and rent received from letting out a part of the society's premises were taxable. Following this decision, the Assessing Officer reopened the assessment for the assessment year 1999-2000 as well, by issuing notice under Section 148 of the Act on 28.03.2006. The assessee in response thereto filed the return declaring 'NIL' income, again taking u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three divisions was Rs.38,355,413/-. In addition, the society had rental income of Rs.26,17,822/- form the use of convention centre and Rs.76,88,328/- from use of other premises which included a sum of Rs.2,05,200/- from a non-members, i.e., M/s. Lacisine Pvt. Ltd. to whom the premises had been let out for providing catering facilities to organizations availing of the society. Further, the society had surplus of Rs.6,21,702/- in the Scope Secretariat account after excluding the interest income. The AO, however, noted that there was a provisions of Rs.1 lacs onwards gratuity in the account of scope Secretariat, which he held was not allowable and therefore, he computed the surplus in that account at Rs.7,21,702/-, which was taxed by him as income from business. The interest income was assessed by him as income from other sources. He also observed that the rental income received from non-members as well as the members was tainted with commerciality as the members such as State Bank of Hyderabad, Dena Bank and Balmer Lawrie who had used the space had used it only as a businessman and not as a member. Moreover, they were governed by the companies Act. Therefore, the AO assessed the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the same were lying idle, would not make the activities of the assessee as commercial activity. 10. Thought process of the Tribunal, in this behalf, is reflected in the following discussion contained in the impugned order, which follows as under: "So far as the present case is concerned, the assessee had not done any business. It had only allowed use of premises to non-members when the same were lying idle with a view to proper utilization of facilities. Merely on this ground, in our view, it will not appropriate to treat the activities of the assessee society as commercial activity." 11. Applying the aforesaid principle, the Tribunal held that interst income from surplus funds would be exempted, as held by this Court in the case of Director of Income Tax (Exemptions) v. All India Oriental Bank of Commerce Welfare Society, 184 CTR 274. However, it also held that the rental income received from non-members for use of convention centre and from M/s. Lacisine Pvt. Ltd. to whom the premises were let out for providing catering services was not to be exempted, as rental income from non-members was taxable. It is because of this reason the appeal was partially allowed. 12. Befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is taxed is, the "income, profits or gains" earned or "arising, "accruing" to a "person". Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded n any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. The Supreme Court also quoted the following passage from Simon's Taxes, Volume B, Third edition: "...it is settled law that if the persons carrying on a trade do so in such a way that they and the customers are the same persons, no profits or gains are yielded by the trade for tax purposes and therefore no as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (on his own behalf and on behalf of Trustees and Committee of Doctor's Cave Bathing Club v. Income Tax Commissioner [1971] 3 All ER 1185. We do not think it necessary to deal at length with the above decisions except to state the principle discernible from them. We understand these decisions to lay down the broad proposition - that, if the object of the assessee company claiming to be a "mutual concern" or "club", is to carry on a particular business and money is realised both from the members and from non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a "mutual concern" or Members' club" is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike is a trade/business/transaction and the resultant surplus is certainly profit - income liable to tax. We should also state, that "at what point, does the relationship of mutuality end a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... members for functions. Likewise, other part of the premises are available to the members for their use. Of course, for using convention centre as well as other parts of the building, these members pay some charges which becomes additional source of income. That by itself cannot be treated as commercial activity of the assessee. In Bankipur Club (supra), the Supreme Court held that if the dealings as a whole disclose the profit earning motives and are alike tainted with commerciality, only then principle of mutuality would cease to apply. The principle in this behalf was discerned as under: "We understand these decisions to lay down the broad proposition - that, if the object of the assessee company claiming to be a "mutual concern" or "club", is to carry on a particular business and money is realised both from the members and from non-members, for the same consideration by giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole disclose the same profit earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a "mutua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the club." Similar question was answered in the case of Saturday Club Ltd. Vs. Asstt. Commissioner, Service Tax Cell, (2006) 3 STR 305 in the following manner: "So far as the merit is concerned, law is well settled by now that in between the principal and agent when there is no transfer of property available question of imposition of service tax cannot be made available. It is true to say that there is a clear distinction between the 'members club' and 'proprietary club'. No argument has been put forward by the respondents to indicate that the club is a proprietary club. Therefore, if the club space is allowed to be occupied by any member or his family members or by his guest for a function by constructing a mandap, the club cannot be called as mandap keeper, because the club is allowing his own member to do so who is, by virtue of his position, principal of the club. If any outside agency is called upon to do the needful it may raise a bill along with the service tax upon the club and the club as an agent of the members, is supposed to pay the same. The authority cannot impose service tax twice once upon the people carrying out the business of 'mandap keeper' as we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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