TMI Blog1980 (2) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... re of them. Except with the previous approval of the Central Govt. no remuneration or other benefit in money or money's worth is to be given by the club to any of its members, whether officers or servants of the club or-not. The only exception made is in respect of payment of out-of-pocket expenses, reasonable and proper interest on money lent to the company and proper rent on premises let to the club. In accordance with the above objects, the assessee provided temporary accommodation in its premises in No. 7, Commander-in-Chief Road, Madras-8. There are furnished rooms within the club premises and during the year of account which ended on 31st July, 1971, relevant to the assessment year 1972-73, it received a sum of Rs. 4,305 by way of rent from the occupation of these rooms. Treating this as income from house property, the ITO brought to tax a sum of Rs. 2,054. On appeal, the AAC upheld the order of the ITO. The assessee took the matter on further appeal to the Tribunal and contended that the receipts from the members for the stay in the club premises did not represent any income, but receipt as a result of mutual association. For the department the contention was that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir mutual benefit. On the contrary, we have here an incorporated company authorised to carry on an ordinary business of race course company and that of licensed victuallers and refreshment purveyors and in fact carrying on such a business. There is no dispute that the dealings of the company with non-members take place in the ordinary course of business carried on with a view to earning profits as in any other commercial concern. It is further admitted that some of the dealings of the company with its members take place in the ordinary course of business and the profits arising out of those dealings, e.g., the fourth item of receipt of Rs. 82,490 (income from entries and 'forfeits received from the members whose horses did not run in the races during the season) are taxable. The company gives to its members the same or similar amenities as it gives to non-members, namely, the use of an unreserved seat in stand, the facility to watch the races and to bet on the horses in the races, use of the totalisator in that stand and the facility for refreshment. In fact the daily ticket fee for admission into the members' enclosure is exactly the same as that for admission into the first-enc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the Commissioner relied on two decisions in support of his contention that the income was liable to be taxed. The first decision is that of the Supreme Court in CIT v. Kumbakonam Mutual Benefit Fund Ltd. [1964] 53 ITR 241. In that case, a company carried on banking business restricted to its shareholders. It received monthly contributions by way of recurring deposits from the shareholders, and, at the end of a fixed period, returned an amount covering the deposits and guaranteed interest thereon for that period. Loans were granted to those shareholders who applied for them and interest was realised on those loans. A shareholder was entitled to participate in the profits as and when dividend was declared, even though he had not taken any loan from the company. The question was whether the company was assessable to tax on the profits derived from the transactions with its shareholders. It was held that the principle of mutuality did not apply and that the profit of the company was taxable in its hands. The essential feature in that case to be noticed can be brought out from a passage, which occurs at page 249 and which runs as follows: " It seems to us that it is difficult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Some members will, participate in other things, but to no members can there truly be said to be a sale. There is, I think, no trade among the members. They cannot trade with themselves. It is upon that ground, I am afraid very imperfectly expressed, but which is fundamental and lies at the root of the thing, that I think that, so far as this camp was used by the members, no profit could accrue from its user. No profit could accrue, any more than profit could accrue from any particular thing done, from the management, say, of the dining room of an ordinary club. " It is common ground that incorporation by itself does not authorise the charge to tax of the surplus arising to the club. As pointed out by the Supreme Court in CIT v. Royal Western India Turf Club [1953] 24 ITR 551 at p. 560: " The principle that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing perse to prevent a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities for the members. " The eligibility for exemption based either on mutuality or absence of profit motive was emphasised at page 446 in the following words : " ......a company may be eligible for exemption of any surplus derived from the dealings of the members either on the principle of mutuality based on the doctrine that no one can make profit out of himself or on the basis that there is no trading or profit motive in the transactions between a club and its members. " The legal position applicable to a members' club was reiterated at page 450 as follows : " This is not also a case of a mere members' club which comes into existence for the purpose of providing certain amenities to the members without any business element as such as in CIT v. Merchant Navy Club [1974] 96 ITR 261 (AP). " On the facts of that case, it was held that the surplus arising out of the members' subscriptions was also taxable, as there was no essential difference between members and non-members in the matter of participation in the races, which were run as a business proposition. As the assessee has not indulged in any trade or business as such, it is not necessary to go into the question whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We have already seen that the Supreme Court has indicated how the principle of mutuality applies to cases other than business. If a club sets about on an adventure of a commercial nature, it would lose its identity as a club, as comprehended by law or in popular parlance and it cannot lay any special claim for exemption. The statute does not provide for any such exemption in the case of clubs merely because they call themselves so. In so far as the decision of the Allahabad High Court runs counter to that of the Supreme Court, it would not be good law. The whole concept of a members' club is alien to profit-making. It is a sharing of common amenities in a spirit of camaraderie. The separate payment for some of the amenities is only a mode of contribution and does not bring its case within the vortex of taxation. The question whether even in a case of a members' club, the profits arising from transactions with non-members could be subjected to tax, will have to be considered in the light of the decisions in Madras Race Club [1976] 105 ITR 433, Carlisle and Silloth Golf Club v. Smith [1913] 6 TC 198 (CA) and National Association of Local Government Officers v. Watkins [1934] 18 TC ..... X X X X Extracts X X X X X X X X Extracts X X X X
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