Kalpesh Classes

Guest entry in club

243 ITR 0089- ​​ CHELMSFORD CLUB VS. COMMISSIONER OF INCOME-TAX (SC) The assessee, a members’ club,​​ provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non-members. The club was run on “no profit no loss” basis in that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the club house was not assessable. Held, that the assessee’s business was governed by the doctrine of mutuality.​​ It was not only the surplus from the activities of the business of the club that was excluded from the levy of income-tax, even the annual value of the club house, as contemplated in section 22 of the Act, would be outside the purview of the levy of income-tax.

The three conditions, the existence of which establishes the doctrine of mutuality are​​ 

• The​​ identity of the contributors to the fund and the recipients​​ from the​​ fund,​​ 

• The treatment of the company, though incorporated as a mere entity for the convenience of the members, in other words, as an​​ instrument obedient to their mandate, and​​ 

• The impossibility that contributors​​ should derive profits from contributions made​​ by themselves to a fund which could only be expended or returned to themselves.

Fundamental Concept:

Under the Income-tax Act, what 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 in 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 law recognises the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. A perusal of section 2(24) of the Income-tax Act, 1961, shows that the Act recognises the principle of mutuality and has excluded all businesses involving such principle from the purview of the Act, except those mentioned in clause 2(24)(vii).​​ 

Income out of sale of soft drink​​ 

The main question canvassed by the Revenue for the assessees being Bankipur Club Ltd., Ranchi Club Ltd., Cricket Club of India and Northern India Motion Pictures Association,​​ was whether the assessee-mutual clubs, were entitled to exemption for the receipts or surplus arising from the sales of drinks, refreshments, etc., or amounts received by way of rent for letting out the buildings or amounts received by way of admission fees, periodical subscriptions and receipts of similar nature from its members.​​ In all these cases, the Tribunal as also the High Court had found that the amounts received by the clubs were for supply of drinks, refreshments or other goods as also the letting out of building for rent or by way of admission fees, periodical subscription, etc., from the members of the clubs were only​​ for/towards charges for the​​ privileges, conveniences and amenities provided to the members, which they were entitled to, as per the rules and regulations of the respective clubs. It had also been found that different clubs realised various sums on the above counts only to afford to their members, the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done with any profit motive, and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members (and their friends, if any, availing of the facilities occasionally). Held, in CIT v. Bankipur Club Ltd. [1997] 226 ITR 97, that in the light of the findings of fact the receipts for the various facilities extended by the clubs to its members, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, could not be said to be "a trading activity." The surplus-excess of receipts over the expenditure-as a result of mutual​​ arrangement, could not be said to be "income" for the purpose of the Act.

Rental income out of the property

The assessee, a members’ club, provided recreational and refreshment facilities exclusively to its members and their guests. Its facilities were not available to non-members. The club was​​ run on “no profit no loss” basis in that the members paid for all their expenses and were not entitled to any share in the profits. Surplus, if any, was used for maintenance and development of the club. The club house was owned by the assessee. The assessee claimed that it was a mutual concern and so the annual letting value of the club house was not assessable.​​ Held that the assessee’s business was governed by the doctrine of mutuality. It was an admitted fact that the business of the assessee did not come within the scope of business.​​ It was not only the surplus from the activities of the business of the club that was excluded from the levy of income-tax, even the annual value of the club house, as contemplated in section 22 of the Act, would be outside the purview of the levy of income-tax.​​ [2000] 243 ITR 0089- ​​​​ Chelmsford Club vs. Commissioner of Income-tax (SC)

Interest Income

252 ITR 0265- ​​ HARYANA STATE CO-OPERATIVER LABOUR AND CONSTRUCTION FEDERATION LTD. VS. CIT (P&H)​​ The tests of mutuality in a nutshell are : the identity as between contributors and beneficiaries, the objective of mutual benefit and the actual activities resulting in either mutual benefit or return of the contribution to the contributors. A co-operative society, it can be inferred​​ from the decisions, can be exempt as a mutual association, if its constitution is so framed and its activities so carried out to accord with the principle of mutuality. If it is so justified, there would be total immunity by way of exemption for the co-operative society without the assistance of the deductions for various activities under section 80P and relaxation in the rate of tax available for co-operative societies.

The assessee, a co-operative society, received contributions from its members. It claimed that the contributions were not exigible to income-tax by the principle of mutuality. The contributors had no control over the funds received by the assessee from them and they could not direct that the remaining amount after meeting the expenses should​​ be returned to them. The funds could only be used for the specific purposes only. The principle of mutuality could not be invoked.​​ 

287 ITR 0263- ​​ Commissioner of Income-tax vs. Bangalore Club (Karnataka High Court)

It is trite law that an association, in​​ order to get the benefit of the principle of mutuality, should confine its activities only as between members.​​ Where such an association banks its surplus funds in fixed deposits, should interest from them be treated as liable to tax as not covered by the​​ mutuality principle, because the banks are not members of such association ? This was the issue posed before the High Court in CIT v. Bangalore Club [2006] 287 ITR 263 (Karn). The High Court concluded that such income from bank interest could not be exempt​​ following its own earlier decision in CIT v. I.T.I. Employees Death and Superannuation Relief Fund ​​ [1998] 234 ITR 308 (Karn). It did not agree that the decision of the Supreme Court in Chelmsford Club v. CIT [2000] 243 ITR 89 ​​ would support the assessee’s case. On the contrary, it felt that the decision of the Gujarat High Court in Sports Club of Gujarat Ltd. v. CIT [1998] 171 ITR 504 would support the view that such income from investments with non-members​​ should be taxable.

Building Society (Delhi High Court)

The assessee, a co-operative house building society established with the specific objective of purchasing agricultural land for development as plots to be allotted to its own members, entered into an agreement with the Government of Haryana which​​ stipulated that the society shall keep 30 per cent. of the amount realised by it from the plot holders from time to time in a deposit for being utilised by the society towards meeting the cost of internal development work in the colony, that the society shall not derive any profit out of the sale of the plots to its members and that it shall allot plots only to its members.​​ The Commissioner (Appeals) and the Tribunal concluded that the utilisation of moneys received from time to time from members and kept in a savings bank account was directly linked with the activity of purchasing agricultural land,​​ developing it and converting it into residential plots after obtaining approval of the Government for allotment to its members and held that the interest on the​​ savings bank account was a capital receipt that went to reduce the cost of the land and was not to be treated as income in the assessee’s hands.​​