M/S. Chelmsford Club Vs. Commissioner of
Income-Tax, Delhi [2000] INSC 100 (2 March 2000)
D.P.Wadhwa,
N.S.Hegde
SANTOSH
HEGDE, J.
The
following two questions were referred to the High Court of Delhi by the Income
Tax Appellate Tribunal (for short the tribunal) in respect of assessment years
1977-78 and 1978- 79 :
1.
Whether on the facts and in the circumstances of the case, the Honble Tribunal
was legally correct in holding that the annual letting value of the Club
building is not assessable to income-tax under the head Income from property ?
2.
Whether on the facts and in the circumstances of the case, the Honble Tribunal
was legally correct in holding that the principle of mutuality applies to the
property income and accordingly it is not taxable income of the assessee ? The
High Court relying on Section 22 of the Income Tax Act, 1961 (hereinafter
referred to as the Act) and following the judgment of Allahabad High Court in
the case of C.I.T., U.P. v. Wheeler Club Limited {(1963) 49 ITR 52} and some
observations of the Delhi High Court in the case of C.I.T., Delhi-II v. Delhi
Gymkhana Club Ltd. (155 ITR 373) answered the question in the negative and in favour
of the Department. Against the said judgment of the High Court dated
11.11.1992, the appellant has preferred these appeals.
On
behalf of the appellant, it is contended before us that the appellant though
registered as a Company under the Companies Act, its business is governed by
the principle of mutuality, therefore, the income, if any, earned by the
appellant is outside the scope of the Income-tax Act. This is based on a
principle that it is the only income which comes within the definition of
Section 2(24) of the Act, that could be taxed and this definition generally
excludes the income from business involving doctrine of mutuality, except the
business that is included specifically in sub-clause (vii) of that Section. The
appellant contends that its business admittedly does not come under that clause,
hence, any income earned by the appellant is not exigible to income-tax. The
appellant relies on a decision of this Court in C.I.T. vs. Bankipur Club
Limited (226 ITR 97). It is further contended by the appellant that what is
taxed under Section 22 of the Act is in reality an income, though in a deemed form
and, therefore, this income is also outside the scope of income-tax in view of
the principle of mutuality. For this proposition, the appellant relies on
another judgment of this Court in the case of Bhagwan Dass Jain vs. Union of
India & Ors. (128 ITR 315). On the contrary on behalf of the Revenue, it is
contended that the business of the appellant is not governed by principle of
mutuality because the said business does not show that there is any identity
between the contributors and the participators as is required for establishing
the doctrine of mutuality. For this proposition, the respondent relies on a
judgment of this Court in the case of C.I.T., Bombay City vs. The Royal Western
India Turf Club Ltd. (RWITC) (21 ITR 31). The respondent also contends that the
levy of tax under Section 22 of the Act is a tax on property and not on income,
therefore, the principle of mutuality does not apply to such levy. For this
argument, the respondent relies upon a judgment of the Allahabad High Court in
the case of C.I.T. vs. Wheeler Club Ltd. (supra).
Before
we proceed to examine the rival contentions addressed before us, we should
notice the undisputed facts necessary for disposal of these appeals which are
as follows :- The appellant provides recreational and refreshment facilities
exclusively to its members and their guests. Its facilities are not available
to non-members. The Club is run on no profit no loss basis in that the members
pay for all their expenses and are not entitled to any share in the profits. Surplus,
if any, is used for maintenance and development of the Club. The Club house
which is the subject-matter of these appeals is owned by the appellant and is
used for providing facilities to its members. In the above factual matrix we
will now examine the questions involved in these appeals.
We
will first decide the question : whether under Section 22 of the Act, tax
levied is on income from property concerned or on the property itself ?
Obviously, this argument of the Revenue that the tax under Section 22 is being
levied not on the income from the property but on the property is on the basis
of the judgment of the Allahabad High Court in Wheeler Clubs case (supra)
wherein a Division Bench of that court held with reference to the business of a
Club as follows:- liability to pay income tax arises from the mere fact of his
owning the property having an annual letting value and not from his actually
deriving any income from it.
Even
if he does not derive any income from it, as, for example, when he occupies it
himself or lets it remain vacant, he is liable to pay tax.
Section
9 does not exempt any income from a house except income from a house occupied
for carrying on a business or profession. The assessee is not carrying on any
business or profession in the quarters; therefore, the income from them is not
exempted by anything contained in section 9. There is no provision and there is
no law which exempts from assessment income from house property on the sole
ground that the contributor of the income and the recipient are one and the
same person. On the other hand, the fact that under the law an owner is liable
to pay income-tax on the annual letting value even if he himself occupies the house,
shows that the principle of mutuality does not apply in a case governed by
section 9. Naturally, when the basis for assessing tax on income from property
is the mere ownership of the property and not the actual realisation of income,
the question whether the payer and the recipient are one and the same person
cannot arise. It is only when what is assessed is income from business that the
principle of mutuality may be applicable; where the basis for assessment is the
earning of income, the question may arise whether the recipient of the income
and the payer are not one and the same person.
It is
to be noticed that this judgment was delivered under the provisions of the
Income-tax Act, 1922 and Section 9 of that Act is similar to Section 22 of the
present Act.
A
perusal of the above judgment shows that the High Court in that case proceeded
on the basis that the liability to pay income-tax under Section 9 arises from
the mere fact of the assessee owning the property having an annual letting
value and not from his deriving any income from it. It also held that the
principle of mutuality does not apply to such measure of taxation. We find it
difficult to agree with the High Court on this point. In our opinion, the High
Court erred in coming to the conclusion that the tax levied under Section 9 of
the Act (Section 22 of the new Act) is a tax on property, for more than one
reason. Under the Act; be it the 1922 Act or the 1961 Act, the same does not
permit the levy of tax on anything other than the income. It is so held by the
courts in India. As far back as in the year 1946,
the Bombay High Court in D.M. Vakil v. C.I.T. (14 ITR 298) held :
It is
true that under the Indian Income-tax Act the only thing that can be taxed is
income and nothing else.
The
charging section is Section 3; it charges the total income of an assessee; and
total income is defined in Section 2(15) as the total amount of income, profits
and gains computed in the manner laid down in this Act. Though the above
judgment was also delivered considering the provisions of the 1922 Act, in our
opinion, the legal position remains to be the same under the 1961 Act also.
Even
if we examine this position independent of the High Courts decision referred to
above, we find that the legislative competence to levy income-tax is traceable
to Entry 82 of List I of Schedule VII to the Constitution which reads : Taxes
on income other than agricultural income.
Therefore,
any law made under this Legislative Entry can impose a tax only on income and
not under any other head, there is also no dispute that the Income Tax Act of
1961 is a law made under this Entry. Hence, it is futile to contend that the
levy of tax under Section 22 of the Act is a tax levied on property and not on
income from property. This view of ours further finds support from a reading of
Section 4 of the Act which is the charging Section. This Section unequivocally
shows that the levy is on income. A conjoint reading of Sections 2(24), 14, 22
and 23 of the Act also makes it abundantly clear that what is being taxed under
Section 22 is the deemed income of an assessee from the property owned by him.
At any rate, this question is no more res integra in view of the judgment of
this Court in Bhagwan Dass Jain (supra) where this Court had an occasion to
deal with this question where the levy of tax on income from house property came
to be challenged on the ground of want of legislative competence, negativing
the contention raised therein and rejecting the challenge, the Court held that
what is being taxed under Section 22 of the Act is, in fact, an income and not
the property. This Court after elaborately considering the decisions of various
courts, came to the following conclusion : Even in its ordinary economic sense,
the expression income includes not merely what is received or what comes in by
exploiting the use of a property but also what one saves by using it oneself.
That which can be converted into income can be reasonably regarded as giving
rise to income. The tax levied under the Act is on the income (though computed
in an artificial way) from house property in the above sense and not on house
property. Entry 49 of List II of the Seventh Schedule to the Constitution is
not, therefore, attracted. The levy in question squarely falls under entry 82
of List I of the Seventh Schedule to the Constitution.
The
above case, in our opinion, squarely answers the arguments advanced on behalf
of the Revenue. Therefore, the judgment of the Allahabad High Court in the case
of Wheeler Club (supra) with regard to the nature of levy under Section 22 is
not a good law.
Having
come to the conclusion that Section 22 of the Act taxes only the income from
property, we will now examine whether such income so far as the appellant is
concerned, is not exigible to tax on the ground that such income is excluded
from the purview of tax, based on the principle of mutuality. The appellant
contends that its business is governed by the principle of mutuality which, in
turn, is based on a doctrine that no person can earn from himself.
It is
the contention of the appellant that in the business undertaken by it, every
member pays for his own expenses and there is no profit motivation or sharing
of profits as such amongst the members. The surplus, if any, from the business
is not shared by the members but is used for providing better facilities to the
members. The appellant further contends that all the factors necessary for
establishing the principle of mutuality in its business is seen from the
admitted facts pertaining to its business. It is argued that unlike in the case
of RWITC, in the business of the appellant, no outsider is allowed to take part
and the facilities provided by the appellant is exclusively for its members and
their guests. Therefore, there is a clear identity between the contributors and
the participators to the fund and the recipients thereof respectively. Per
contra, based on the decision of this Court in the case of RWITC (supra), the
Revenue contends that for the doctrine of mutuality to be applicable, there
should be a clear identity between the contributors and the participators to
the fund and the recipients thereof respectively, which, according to the
Revenue, is lacking in the case of the appellant. A perusal of Section 2(24)
shows that the Act recognises principle of mutuality and has excluded all
businesses involving such principle from the purview of the Act, except those
mentioned in Clause (vii) of that Section. It is also an admitted fact that the
business of the appellant does not come within the scope of business referred
to in Section 2(24)(vii). This Court in the case of RWITC (supra) on facts came
to the conclusion that the Club in that case had kept open its business not
only to its members but also to outsiders who would participate in the Clubs
business on payment which income from the outsiders would go to the same kitty
as that of the members, consequently, the identity between the contributors and
the recipients was lost.
Therefore,
this Court held that the doctrine of mutuality did not apply in the case of
RWITC (supra), otherwise this Court in that judgment had accepted that, in
regard to the businesses governed by the doctrine of mutuality, the levy of tax
under the Income-tax Act did not arise. This is clear from the observations of
this Court in that judgment which are as follows:- It is clear to us, taking
the facts admitted or found in the case before us, that the principles of
Styles case, as explained by subsequent decisions noted above, can have no
application to this case. Here there is no mutual dealing between the members
inter se in the nature of mutual insurance, no contribution to a common fund
put up for payment of liabilities undertaken by each contributor to the other
contributors and no refund of surplus to the contributors. There being no
mutual dealing the question as to the complete identity of the contributors and
the participators need not be raised or considered. Suffice it to say that in
the absence, as there is in the present case, of any dealing between the
members inter se in the nature of mutual insurance the principles laid down in
Styles case and the cases that followed it can have no application here.
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 per se 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 with
its members besides the profit it makes from the general public which deals
with it but that profit belongs to the members as shareholders and does not
come back to them as persons who had contributed them. Where a company collects
money from its members and applies it for their benefit not as shareholders but
as persons who put up the fund the company makes no profit. In such cases where
there is identity in the character of those who contribute and of those who
participate in the surplus, the fact of incorporation may be immaterial and the
incorporated company may well be regarded as a mere instrument, a convenient
agent for carrying out what the members might more laboriously do for
themselves.
But it
cannot be said that incorporation which brings into being a legal entity
separate from its constituent members is to be disregarded always and that the
legal entity can never make a profit out of its own members. What kinds of
business other than mutual insurance may claim exemption from tax liability
under Section 10(1) of the Act under the principles of Styles case need not be
here considered; it is clear to us that those principles cannot apply to an
incorporated company which carries on the business of horse racing and realises
money both from the members and from non-members for the same consideration,
namely, by the giving of the same or similar facilities to all alike in course
of one and the same business carried on by it." From the above extract of
the judgment, it is crystal clear that 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. In the above case, this Court quoted
with approval the three conditions stipulated by the Judicial Committee in the
case of English & Scottish Joint Cooperative Wholesale Society Ltd. v.
Commissioner of Agriculture Income-tax, Assam (1948 AC 405 at 419), existence
of which establishes the doctrine of mutuality. They are as follows :- (1) the
identity of the contributors to the fund and the recipients from the fund, (2)
the treatment of the company, though incorporated as a mere entity for the
convenience of the members and policy holders, in other words, as an instrument
obedient to their mandate and (3) the impossibility that contributors should
derive profits from contributions made by themselves to a fund which could only
be expended or returned to themselves.
If we
apply the above three criteria to the facts of the case in hand then we find
that the appellants business is governed by the doctrine of mutuality. That apart,
this Court in the case of C.I.T. vs. Bankipur Club Limited (supra) also had an
occasion to deal with the claims of a number of Clubs seeking benefits based on
the principle of mutuality. In that case, this Court held :- 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.
In the
same case while considering the case of the Cricket Club of India arising out
of C.A. No.10194/95 and C.A. No.3382/97 (the facts of which cases are similar
to the case with which we are concerned), it was held :- 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.
Following the decision rendered by the Appellate Tribunal, Bombay Bench-A, for the assessment years
1974-75 and 1976-77 rendered in I.T.As. Nos.1730 and 1913/(Bombay) of 1980, the
Appellate Tribunal held that no portion of the club house, Patiala Pavilion,
etc. is let out to strangers and that these portions are let out only to the
members and so, even if any income had actually accrued due from the members on
the above counts, it will not be taxable on the principle 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. No.10194 of 1995 and the High Court declined to
refer any question of law for this year as well.
In
fact, for 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 for its decision. (emphasis supplied).
From
the above observations of this Court, it is clear that it is not only the
surplus from the activities of the business of the Club that is excluded from
the levy of income-tax even the annual value of the Club House, as contemplated
in Section 22 of the Act, will be outside the purview of the levy of income-
tax. To this extent also, we find that the judgment of the Allahabad High Court
in the case of Wheeler Club (supra) is not a good law.
The
High Court in the impugned judgment, apart from relying on the judgment of the Allahabad
High Court in Wheeler Clubs case (supra) also relied on certain observations
made by the same court in the case of C.I.T.
v.
Delhi Gymkhana Club Ltd. (155 ITR 373 at 376) which reads thus :
Letting
out of the premises is merely a provision of a facility for members. The
principle of mutuality clearly applies to the surplus earned as a result of
such activities. It may be that if the income can be treated as rent derived
from house property, the rent or the income derived from house property will be
assessable under section
22.
That may be so because of the statutory fiction contained in section 22 of the
Act and the scheme of the I.T Act, that the income from house property will be
assessable on notional basis.
In our
opinion, the High Court in Delhi Gymkhana case (supra) has not laid down any
principle of law. It has merely proceeded on a hypothesis. At any rate the
conclusion based on that hypothesis, in our opinion, being opposed to the
principle accepted by us in this judgment will not be of any assistance to the
Revenue.
For
the reasons stated above, we are of the view that the business of the appellant
is governed by the principle of mutuality even the deemed income from its
property is governed by the said principle of mutuality. Therefore, these appeals
have to succeed. Accordingly the appeals are allowed and the judgment impugned
herein is set aside. The questions referred by the tribunal are answered in the
affirmative and in favour of the appellant. On the facts and circumstances of
these cases, the parties will bear their own costs.
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