Research › Search › Judgment

Kerala High Court · body

2006 DIGILAW 132 (KER)

Commissioner of Income Tax v. Trivandrum Club

2006-02-27

K.S.RADHAKRISHNAN, K.T.SANKARAN

body2006
Judgment :- Radhakrishnan, J. The Income-tax Appellate Tribunal, Cochin Bench on a direction given by this court in OP.7449 of 1999 has referred the following question of law for our opinion under section 256 (2) of the Income-tax Act. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the rental income received by the assessee from non-members was not taxable? The Trivandrum Club, the assessee, is a private club situated at Trivandrum. The bye-laws of the club show that it was formed mainly to provide entertainment to its members by providing accommodation, library, reading room etc. and by encouraging sports and games among member. Return of income for the year 1988-89 was filed by the assessee along with a covering letter from M/s. Suri Co. Chartered Accountants, Trivandrum showing the details of income, but at the same time pointed out that it is not an assessable entity. Assessee’s representative had taken up the stated that assessee is governed by the “doctrine of mutuality” and therefore its income is not taxable. Assessing authority noticed that apart from the activities of the club for providing entertainments to its members etc. assessee had income by letting out its marriage hall to non-members. Assessee authority took up the view that the assessee does not satisfy the conditions to attract the doctrine of mutuality since it was noticed that the marriage hall was rented out to nonmembers to yield income. Assessing authority took the view that the assessee is an association of persons and was assessed income of Rs.9,77,040/-. Aggrieved by the matter in appeal before the Commissioner of Income-tax (Appeals), Trivandrum. Commissioner allowed the appeal placing reliance on the decision of this court in assessee’s own case in Commissioner of Income-tax v. Trivandrum Club, (1989) 177 ITR 550). Reference was also made to few other decisions on the doctrine of mutuality. Commissioner took the view that assessee is not an assessable entity under the Income-tax Act. Aggrieved by the said order revenue took up the after noticing that the building was let out to nonmembers and amounts were settled by members and therefore Tribunal took the view that there is no material difference between the assessment year 1988-89 as well as the earlier assessment year which was covered by the decision in 177 ITR 550. 2. Aggrieved by the said order revenue took up the after noticing that the building was let out to nonmembers and amounts were settled by members and therefore Tribunal took the view that there is no material difference between the assessment year 1988-89 as well as the earlier assessment year which was covered by the decision in 177 ITR 550. 2. We may first examine as to whether Commissioner of Income-tax v. Trivandrum Club case (supra) would apply so far as the assessment year 1988-89 is concerned. In Trivanduram club’s case this court was dealing with the assessment year 1974-75. In that year assessee had claimed exemption of the income on the doctrine of mutuality. The ITO rejected the plea and held that the rules and byelaws of the club enabled it to allow nonmembers to enjoy the facilities of the club. CIT (Appeals) however, noticed that the club had not allowed any person other than a member to occupy the club during the year ending December 31, 1973 and so the facilities available in the club were used exclusively by the members. Tribunal also placed reliance on the statement of the secretary and held that during the relevant period no nonmember was allowed to occupy any room of the club. The court therefore held that the assessee is entitled to exemption under the doctrine of mutuality. It is worthwhile to refer a portion of the judgment which is extracted hereunder: “The CIT(A) as also the Tribunal have concurrently held that during the relevant accounting period, no nonmember was allowed to enjoy the facilities of the club, and that so long as the occupation of the room is referable to the amenities provided for the members themselves, no income can be said to have been earned. This is a pure finding of fact. On the basis of this finding, the conclusion is inevitable that no trading element is involved when the club charges a member for the amenities provided to him. It follows that the respondent/assessee is entitled to exemption under the doctrine of mutuality. On these premises, the assessee is entitled to exemption.” The fact we get for the assessment year 1988-89 is entirely different. Admittedly the club is having a marriage hall. Assessing officer verified the records and noticed that the hall was rented out to nonmembers. It follows that the respondent/assessee is entitled to exemption under the doctrine of mutuality. On these premises, the assessee is entitled to exemption.” The fact we get for the assessment year 1988-89 is entirely different. Admittedly the club is having a marriage hall. Assessing officer verified the records and noticed that the hall was rented out to nonmembers. Assessing authority noticed that the hall rent was paid by nonmembers and not by members. Consequently identity of the contributor and participator does not exist. True, members have joined together for the purpose of entertainment by themselves and in the course of that activity they wanted to earn some income by letting out the marriage hall on hire and also for various activities. Real contributors of income by availing of the facilities of the marriage hall are not the members but nonmembers. In order to enable them to avail of the facilities of the club, nonmembers are to be given temporary membership only for the purpose of availing of this benefit. 3. The application of doctrine of mutuality was considered by the apex court in C.I.T. v. Bankipur Club Ltd. (1997) 266 ITR 97. The court held in order to apply the doctrine of mutuality there must be complete identity between the contributors and the participators. The court quoted with approval the reasoning of the Supreme Court in CIT v. Royal Western India Turf Club Ltd. (1953) 24 ITR 551, CIT v. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 ITR 241 and the Doctor’s Cave Bathing Club v. ITC (1971) 3 All ER 1185 (PC) and held 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 realized both from the members and from nonmembers, 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 transaction entered into with the members or nonmembers alike is a trade/business/ transaction and the resultant surplus is profit-income liable to tax. 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 transaction entered into with the members or nonmembers alike is a trade/business/ transaction and the resultant surplus is profit-income liable to tax. The court held that there must be completed identity between the contributors and the participators. The above mentioned decision was followed by the apex court in Chelmsford Club v. CIT, (2000) 243 ITR 89. The court held that under the Income-tax Act, 1961, 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 person 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 recognizes the principle of mutuality excluding the levy of income-tax from the income of such business to which the above principle is applicable. In that case the apex court held that the asessee’s business was governed by the doctrine of mutuality. 4. The decision in Chelmsford Club’s case was later followed by the apex court in Upper India Hire Purchase Co. v. CIT (Delhi), (2001) 251 ITR 642. On facts the court held that the assessee is not entitled to exemption. If we apply the above mentioned principle we are of the view the Tribunal has not approached the issue in the correct perspective. We have already held that Trivandrum Club’s case reported in (1989) 177 ITR 550 is distinct on facts. That was decided on the basis of the admitted factual position that no nonmember was enjoying the facilities of the club. Facts in this case are different. We have already held that Trivandrum Club’s case reported in (1989) 177 ITR 550 is distinct on facts. That was decided on the basis of the admitted factual position that no nonmember was enjoying the facilities of the club. Facts in this case are different. Marriage hall was admittedly being rented out to nonmembers making them as temporary members only for the purpose of letting out the marriage hall and the amounts received from nonmembers are provided at the hands of the assessee. Principle of mutuality therefore in our view would not apply in such facts situation. 5. Under such circumstance we hold that the Tribunal was not justified in holding that the rental income received by the assessee from non-members was not taxable. We therefore answer the question in favour of the Revenue. The order passed by the Tribunal is accordingly set aside and the matter is remitted to the assessing authority for fresh consideration in the light of our findings. Forward a copy of this judgment to the Income-tax appellate Tribunal, cochin Bench.