of Income-Tax, Bier Vs. M/S. Bankipur Club Ltd.  INSC 530 (8 May 1997)
PARIPOORNAN, S. SAGHIR AHMAD
NOS. 505/92, * SLP(C) 22644/94, CA 3974/92, 4777-78/89, 4534/91, 1635/94,
1648-1649/94, 2380-82/94- SLP (C) 2811/94, CA 8046/95, 1773/92, 4303/95,
3840/96 AND 10194/95.
3382/97 ** CA 3383/97 Present:
Mr. Justice K.S. Paripoornan Hon'ble Mr. Justice S. Saghir Ahmad J. Ramamurthy,
Harish N. Salve, Sr. Advs, S. Rajappa, Dhruv Mehta, B. Krishna Prasad, P. Parmeswaran,
D.S. Mehra, U. Rana, Rajiv Tyagi, Sudhanshu Tripathi, M.J.S. Rupal, P. Mukherjee,
Sanjoy Kumar Ghosh, (Manoj Swarup) Adv. for M/s. Manoj Swarup & Co., S.K. Aggrawal,
Vinay Vaish and Amarendra Sharan, Advs. with therm for the appearing parties.
following Judgment of the Court was delivered.
leave granted in SLP (C) Nos. 22644/94 and 2811/94.
This batch of 23 cases was posted together. That was so done on the basis that
the same and identical point arises for consideration in all of them. On
further verification, it turned out that in 7 appeals, the point that arises
for consideration is little different. On the question arising in those appeals
no arguments were advanced. So, the said seven appeals are de-linked, to be
posted later for hearing.
convenience sake, the 23 cases including seven appeals which are de-linked can
be classified into 5 groups.
C.A. Nos. 854-858/86 Commissioner of
Income-tax * Bihar v. M/s. Bankipur Club Ltd. Group-B:
C.A. Nos. 505/92 and 3974/92 - Commissioner of Income-tax. Bihar-II v. Ranchi
Club Ltd., Group-C: C.A. No. 5382./97 (arising out of SLP (C) No.22644/94 and
C.A. No.10194/95 - Commissioner of Income tax Bombay v. Cricket Club of India;
Group-D: C.A. Nos. 1635/94 * 1648-49/94, 2380-82/94 and C.A. No. 3583/97
(arising out of SLP (C) No. 2811/94) - Commissioner of Income tax Jalandhar v.
Northern India Motion Pictures Association, Group-E: C.A. Nos. 4777-78/89,
4534/91, 8046/95, 1773 (NT)/92, 4303/95 and 3840/96 - Commissioner of Income
tax, Kanpur v. Cawnpore Club Ltd.
state earlier, the appeals coming within Group - E - CIT, kanpur V. Cawnpore
Club Ltd. (seven appeals) are de- linked and they will be posted separately to
be heard on merits. We shall indicate the reason for this a little later.
heard counsel. The following vital aspects should be borne in mind in
adjudicating the question that arises for consideration in this batch of 16
appeals (covered by Groups A to D). The Revenue is the appellant in all the
respondents in all the appeals are "Members' Clubs".
are also called "social action groups". They are all companies,
registered under Section 25 of the Companies Act, 1956 - "non-profit
companies". The respondents are assessees to income tax. They claimed
exemption on their "surplus receipts" on the ground that they are
"clubs" - a species of mutual undertaking, and do not carry on any
"trade or business". They do not earn any profit. The income received
by the clubs by extending facilities to non-members is not in issue in this
batch of appeals. According to Revenue, even the surplus receipts of the clubs
by affording facilities to its members, is "income" and so, taxable.
That is the sole question arising for consideration in this batch of appeals.
Under the Income-tax Act (hereinafter referred to as 'the Act') what is taxed
is, the "income, profits or gains earned or "arising",
"accruing' to a person". The question is whether in the case of
Members' Clubs - a species of mutual undertaking - in rendering various
services to its members which result in a surplus, the club can be said to
"have earned income ar profits" In order to answer the question, it
is necessary to have a background of the law relating to "Mutual
trading" or "Mutual undertaking" and a "Members'
7. In Halsbury
Laws of England, 4th Edition Reissue Volume 23 paras
161 and 162 (pages 130 and 132), the relevant law is stated thus:
a number of persons combine together and contribute to a common fund for the
financing of some venture or object and will 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.
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.
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.
xxs Members clubs are an example of a mutual undertaking, but, where a club
extends facilities to non-members, to that extent the element of mutuality is
wanting............. " (Emphasis supplied) Simon's Taxes Vol.B 3rd
Edition, paragraphs B 1.218 and B1.222 (pages 159 and 167), formulate the law
on the point, thus:
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 assessment in respect of
the trade can be made. Any surplus resulting from this form of trading
represents only the extent to which the contribution of the participators have
proved to be in excess of requirements. Such a surplus is regarded as their own
money and returnable to them. In order that this exempting element of mutuality
should exist it is essential that the profits should be capable of coming back
at some time and in some form to the persons to whom the goods were sold or the
"lt has been held that a company conducting a members' (and not a
proprietary) club, the members of the company and of the club being identical,
was not carrying on a trade or business or undertaking of a similar character
for purposes of the former corporation profits tax.
members' club is assessable, however, in respect of profits derived from
affording its facilities to non-members. Thus, in Carlisle and Silloth Golf
Club v. Smith [1913(3) K. B. 75], where members' golf club admitted non members
to play on payment of green fees it was held that it was carrying on a business
which could be isolated and defined and the profit of which was assessable to
income tax. But there is no liability in respect of profits made from members
who avail themselves of the facilities provided for members." (emphasis
supplied) In British Tax Encyclopedia (I) 1962 edition (edited by G.S.A. Wheatcroft)
at pages 1200 and 1201, dealing with "Mutual trading operations", the
law is stated, thus:- "In several early cases there were dicta to the
effect that a man could not make a profit be trading with himself this
developed into the proposition that when persons contribute to a common fund in
pursuance of a scheme for their mutual benefit, having no dealings or relations
with any outside body, they cannot be said to have made a profit when they find
they have overcharged themselves and that some portion to their contributions
incorporate themselves into a separate entity to carry out the mutual scheme
and the surplus contributions are put to reserve and not immediately returned.
For this doctrine to apply it is essential that all the contributors to the
common fund are entitled to participate in the surplus and that all the
participators in the surplus are contributors so that there is complete
identity between contributors and participators.
means identity as a classs so that at any given moment of time the persons who
are contributing are identical with the persons entitled to participate; it
does not matter that the class may be diminished by persons going out of the
scheme or increased by other coming in. .. ... ... ... ...
doctrine now has application in three areas. First, it applies to mutual
insurance companies; secondly, it applies to certain municipal undertakings
and, thirdly, to members' clubs, and mutual associations generally, whether
incorporated or unincorporated, except registered industrial and provident
... ... ..." (emphasis supplied) It should be noticed that in the case of
"mutual society or concern" (including a "Members' club"),
there must be complete identity between the class of contributors and the class
of participators. The particular label or form by which the mutual association
is known, is of no consequence. The said principle which has been laid down in
the leading decisions and emphasised in the leading English text books
mentioned above, has been explained with reference to Indian decision in
"The Law and Practice of Income Tax" (8th edition vol. 1, 1990) by
Kanga & Palkhivala at page 113, thus:- "...... The contributors to the
common fund and the participators in the surplus must be an identical body.
That does not mean that each member should contribute to the common fund or
that each member should participate in the surplus or get back from the surplus
precisely what he has paid.
The Madras. Andhra Pradesh and Kerala High
Courts have held that the test of mutuality does not require that the
contributors to the common fund should willy-nilly distribute the surplus amongst
themselves: it is enough if they have a right of disposal over this surplus,
and in exercise of that right they may agree that on winding up the surplus
will be transferred to a similar association or used for some charitable objects
crucial issue that arises for consideration in cases where it is claimed that
on the basis of the principle of mutuality, the receipts by the
"society" or "club" is exempt from taxation, has been
succinctly stated by the judicial Committee of the Privy Council in Fletcher v.
Tax Commissioner [1971 (3) AJI ER 1185 at page 1189], thus:
... ... Is the activity, on the one hand, a trades or an adventure in the
nature of trade producing a profit, or is it, on the other, a mutual
arrangement which, at most, gives rise to a surplus?" In substance, the
arrangement or relationship between the club and its members should be of a
9. In C.A. Nos. 854-858184 (Group-A), the assessee is M/s. Bankipur
Club Ltd.. The appeals are preferred against the common judgment of the Patna
High Court rendered in T.C.
dated 14.10.1980 reported as Commissioner of Income-tax, Bihar v Bankipur Club Ltd. (129 ITR 787). The questions
referred to the High Court are the following:
Whether, on the facts and in the circumstances of the case the profits arising
from the sales made to the regular members of the club is entitled to exemption
on the doctrine of mutuality.
Whether, on the facts and in the circumstances of the case the directions given
by the Tribunal are valid in law?" The assessment years involved are
1960-61 to 1964-65.
club filed "nil" returns. The assessee had income from house property
and also from business or professica. The receipt under the head "sale of
drinks at the Bar" was alone disputed in all the aforesaid five years.
Income Tax Officer held that the profit on the sale proceeds of the drinks by
the club in income and so, liable to be taxed. It is seen that the main object
of the club, as per the memorandum of association, is to afford to its members
all the usual privileges, advantages, conveniences and accommodation of a club.
Clause 5 of the memorandum of association makes a provision that upon a
winding-up or dissolution of the company if there remains any property left
after the satisfaction of all debts and liabilities the same shall be paid to
and distributed amongst the members of the company in equal shares. Article 6
of Articles of Association reads thus:
permanent members shall be deemed to be members of the club." Article 15
speaks of temporary members who may be elected for non exceeding three months
in any calendar year.
become a temporary member the person would be a person not permanently residing
at Patna or within ten miles of it.
fee is payable by them, but they are to pay a fixed monthly subscription. Under
Article 5, the Governor and the Chief Minister of the State may be invited by
the committee to become honorary members of the club. Article 17 is a provision
for giving to the temporary and the honorary members all the privileges of the
club, subject to such restrictions and regulations as may be prescribed by the
rules or bye-laws of the club. They have, however, no right to vote at a
meeting or be elected on committees or bring any guest. The assessments were
upheld by the Appellate tribunal accepted the plea of the assessee that the
principle of mutuality would apply in regard to the sale of drinks at the bar.
It was held that as regards sales to regular members the profit arising from
sales to them is not liable to be taxed under the principle of mutuality. The
High Court adverted to the fact that nobody is allowed to enjoy the privileges
of the club other than its members and the bar in question where drinks are sold
is open to its members, both permanent as well as temporary, and that no
outsider can purchase any drink from the said club. The High Court took the
view that while selling drinks to its members, it is not done with motive of
profit earning which can be said to be tainted with "commerciality".
The members pay the monthly subscription and in addition, they enjoy the
benefit of this privilege of supply of drinks to them on additional payment and
so there is no profit earning motive so far as this transaction is concerned.
The Court concluded that the profits arising from the sales of drinks at the
bar to the regular members of the club is entitled to exemption on the doctrine
C.A No. 505/92 and C.A No. 3974/92 (Group-B), the assessee is Ranchi Club Ltd.
The main decision is one rendered in T.C. 54/80, subject matter of C.A. 505/92.
The judgment is dated 24.9.1991 and is reported in Commissioner of Income-tax
v. Ranchi Club Ltd. [196 ITR 137 (FB)]. The questions referred to the High
Court are as follows:
Whether on the facts and in the circumstances of the case. the Tribunal has
rightly held that the assessee-club is a mutual concern? (ii) Whether, on the
facts and in the circumstances of the case, the Tribunal has rightly held that
the income derived by the assessee- club from its house property let to its
members and their guests is not chargeable to tax? (iii) Whether, on the facts
and in the circumstances of the case, the Tribunal has rightly held that the
income derived by the assessee-club from sale of liquor, etc, to its members
and their guests is not taxable in its hands" In these cases, the assessee
was a company formed with the main object of providing a club house and other
conveniences for the use of its members and their friends.
memorandum of association provided for contribution has the members to the
common fund of the club, guarantee towards debts and liabilities, and upon
winding up, their participation in the surplus. Apart from the concept of
"member" envisaged a in the memorandum, it had created one more class
described as temporary members. The temporary members were not deemed to be
members. For the assessment year 1977-78. the assessee had filed its return
showing its income under the head property" representing the income
arising out of gross rent and reservation charges received by it from persons
other than members. But, the Income-tax officer, while assessing the income,
also the Income-tax Officer, while assessing the income, also included the
amount received by the assessee even from its members on account of rent from
the club property and the receipts on sale of liquor, etc, to its members and
their guests. The decision rendered by the High Court as summarised in the
head-note (196 ITR 137 at page 139) is as follows:- ".. .. that merely
because the assessee company had entered into transactions with non-members and
earned profits out of transactions held with them, its right to claim exemption
on the principle of mutuality in respect transactions held by it with its
members was not lost. The assessee was a mutual concern. The income derived by
it from its house property let to its members and their guests and from the
sale of liquor etc.. to its members and their guests was not taxable in its
hands." (emphasis supplied)
C.A. No. 10194/95 and C.A. No...../97 (arising, out of SLP (C)
22644/94) relate to the assessee, the Cricket Club of India. The proceedings
relate to Assessment years 1977-78 and 1978-79. Amongst others, the Cricket
Club of India was in receipt of income from property owned by it - chambers in
the building of the assessee let out to members, annual value of the club house
and annual value of Patiala Pavilion. The above facilities were provided only
to members of the association and that too temporary accommodation. The
arrangement was essentially for the benefit of the members.
the decision rendered by the Appellate Tribunals Bombay Bench, for the
assessment years 1974-75 and 1976-77 rendered in ITA Nos. 1730 and 1913
(Bombay) of 1980 the appellate tribunal held that no portion of the Club House.
Pavillion etc. is let out to strangers and that these portions are let out only
to the members and so, even if an income had actually accrued due from the
members on the above counts, it will not be taxable on the principles of
mutuality. In the application filed under Section 256(2) of the Act, the High
Court declined to refer the question of law posed by the Revenue, to the
effect, "whether the appellate tribunal was justified in law in holding
that the income from the property held by the assessee could not be brought to
charge under the provisions of Sections 22 to 26 of the Act?" The decision
was followed for the assessment year 1978-79 - C.A. 10194/95 and the High Court
declined to refer any question of law for this year as well. In fact both the
years. the decision of the appellate tribunal to the effect that the income
received from the aforesaid counts is exempt under the principle of mutuality,
was not doubted by the High Court? holding that no referable question of law
arose by its decision.
now come to Group-D In C.A. Nos. 1635/94. 1648-49/94, 2380-82/94 and C A
3383/97 @ SLP 2811/94) come within this group. The assessee in this case is
Northern India Motion Pictures Association. The details with regard to the
above appeals are as follows:
S. NO. NO. ASSESSMENT REMARKS YEARS
No.1635 of 1987-88 Appln. U/S 1994 256(2) rejected
Nos. 1648- 1982-83 & 1985- do 49 of 1994 86
Nos. 2380- 1974-75 to 1976- Reference 82 of 1994 77 answered in favour of assessee
------------------------------------------------------------ 4. SLP (C) No.
2811 1989-90 Appln. U/S.
1994 256(2) rejected
------------------------------------------------------------ The assessee is an
association consisting of Film Distributors and Exhibitors incorporated as a
company under Section 25 of the Companies Act? 1956 (Section 26 of the
Companies Act, 1913) in the year 1949 The income of the Association consists of
(i) admission fees, readmission fees, periodical subscriptions from the
members, etc. under the head "others" and (ii) service charges from
the members for rendering specific services to the members under the head
"Service to the members". The income under the head "Service to
the members" was always offered for tax and assessed to tax under Section
28(iii) of the Act and there is no dispute about the same. The income under the
head "others" was claimed to be not taxable on the principle of
mutuality. The claim of the assessee for exemption from levy of tax, on the
ground of "mutuality" was denied in view of clause 7 of the
Memorandum of Association of the Assessee.
was to the following effect:- "If upon the winding up or dissolution of
the Association there remains after the satisfaction of all its debts and
liabilities any property whatsoever the same shall not be paid to or
distributed amongst the members of the Association but shall be given or
transferred to such other institution or institutions having objects similar to
the objects of the Association to be determined by the members of the
Association at or before the time of dissolution or in default thereof by the
Prime Minister of East Punjab, and if and so far as effect cannot be given to
the aforesaid provision then to some charitable object." (emphasis
supplied) In an earlier assessment year, 1977-78 an identical question relating
to the same assessee arose before the High Court of Punjab & Haryana in ITR
No. 69/81. The decision thereon dated 27.4.1989 is reported in Commissioner of
Income-tax v. Northern India Motion Pictures Association [180 ITR 160]. The
following questions were referred to the High Court:- "(1) Whether, on the
facts and in the circumstances of the case. the principle of mutuality is
applicable to the assessee's receipts under the head 'Others'? (2) Whether, on
the facts and in the circumstances of the case, the Tribunal was right in
holding that the receipts under the head 'Others' were neither income liable to
be taxed under the head 'Business' nor under the head 'Other sources? The facts
in the said case and the decision by the High Court are neatly summarised in
the head note of the reports at pages 160-161:- "The, assessee was an
association and its members were film distributors and exhibitor's.
association protected the rights of, its members in return for admission fees
and periodical subscription and also rendered specific services in return for
separate charges. The Income-tax Officer wanted to subject the assessee to tax
on the income derived from the admission fee, periodical a subscriptions and
specific service charges received from the members. The assessee pleaded that
the receipts were exempt from tax on the general principle of mutuality. The
Income- tax Officer did not agree with the plea on the grounds that in clause 7
of the memorandum of association it was provided that upon winding up or
dissolution of the association, the remaining property, after the satisfaction
of its debts and liabilities, shall not be paid or distributed amongst the members
but shall be given or transferred to such other institution or institutions
having similar objects to be determined by the members at or before the time of
dissolution, or in default thereof by the Prime Minister of the East Punjab and
if this could not be done, then, to some charitable object and hence the amount
was not to go back to the members. The Tribunal however held that the income of
the assessee was not taxable. On a reference:
that the contributors by incorporating clause 7 did not deprive themselves of
the control on the disposal of the surplus.
they could agree to divide the surplus among themselves or to contribute the
amount to a similar association or to a charitable trust. The assessee was a
mutual benefit association and its income was not taxable." The said
judgment was followed subsequently in all matters arising under Sections 256(1)
and 256(2) of the Act. So, for the assessment years which are subject matter of
cases falling under Group-D stated herein above, the above decision reported it
180 ITR 160 was followed and the income received by the assessee under the head
"Others" - admission fees readmission fee. periodical subscription
from the members etc. were held to be exempt or non-taxable on the principle of
The above four sets of cases falling in Groups A to D shall alone be covered by
this Judgment. With regard to 7 cases/appeals falling in Group-E the Assessee
is Cawnpore Club Ltd. It is seen that the income that was sought to be assessed
in the case of assessee, was one derived from property let out and also
Interest received from F.D.R., N.S.C. etc. In these cases the Court held that
income should be assessed as one from other sources" and not income from
property. It does not appeal that the larger plea that the income is totally
exempt on the principle of mutuality, was decided in favour of the assessee in
the appeals filed by the Revenue the only question that may probably arise is
whether income received from the property let out and interest by way of F.D.R's.,
N.S.C. etc. can be brought to tax under the head; income from property".
Since the issue raised in this batch of seven cases, is not similar to or same
as the one involved in the other cases coming under Groups A to D. we do not
propose to deal either a with the facts or the decisions rendered be the
authorities in this batch of cases (Group-E). All that we propose to do is to delink
the cases coming under Group-E and direct them to be posted separately for
hearing and disposal before an appropriate Bench.
Now we turn to the main question canvassed be the Revenue in the appeals coming
under Groups A to D, namely, whether the assessees, mutual clubs. are entitled
to exemption for the receipts or surplus arising from the sales of drinks
refreshments etc. or amounts received be 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
appellate tribunal as also the High Court have found that the amount received
by the clubs were for supply of drinks? refreshments or other goods as also the
letting out of building for rent or the amounts received be 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 has also been found that different clubs realised
various sums on the above counts only to afford to its 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.
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)
In the light of the above findings, it necessarily follows that the receipts
for the various facilities extended by the clubs to its members, as stated
herein above as part of the usual privileges, advantages and conveniences;
attached to the members of the club, cannot be said to be "a trading
activity." The surplus - excess of receipts over the expenditure - as a
result of mutual arrangement, cannot be said to be income" for the purpose
of the Act.
Our attention was invited to a few decisions which have dealt with the subject
matter in issue herein. The list of the various English decisions has been
succinctly summarised in the textbooks which we have adverted to herein above (Halsbury's
Laws of England, Simon's Taxes, Wheatcroft etc.). Particular stress was laid on
the decisions of the Supreme Court in Commissioner of Income-tax. Bombay City v. The Royal Western India Turf Club Limited [24 ITR 551], Commissioner of Income-tax. Madras v. Kumbakonam Mutual Benefit Fund
Ltd [53 1TR 241], Fletcher (on his own behalf and on behalf of Trustees and
Committee of Doctor's Cave Bathing Club) v. lncome Tas Commissioner [1971 (3)
All ER (PC) 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 like 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 and that of
trading begin" is a difficult and question. A host of factors may have to
be considered to arrive at a conclusion. "Whether or not the persons
dealing with each other, is a "mutual club" or carrying on a trading
activity or an adventure in the nature of trade".is largely a question of
fact. [ Wilcock's case - 9 Tax Cases 111, (132) C.A. (1925) (1) KB 30 at 44 and 45.].
the result, we hold that ht judgment and orders passed by the High Courts
covered by Groups A,B,C And D, as stated above, do not merit any interference.
The reasoning and conclusion of the High Courts in the judgments and orders
impugned are in accord with the settled legal principles as laid down by
Courts. The 16 appeals covered by Groups A to D filed by the Revenue are,
therefore, dismissed with costs, including advocate's fees which we estimate at
Rs. 5,000/- in each appeal.