Gujarat High Court
Rajpath Club Ltd. vs Commissioner Of Income-Tax on 25 November, 1993
Equivalent citations: [1995]217ITR379(GUJ)
Author: M.B. Shah
Bench: J.M. Panchal, M.B. Shah
JUDGMENT M.B. Shah, J.
1. The Income-tax Appellate Tribunal has referred the following question under section 256(1) of the Income-tax Act, 1961, for our opinion :
"Whether, on the facts and in the circumstances of the case, the interest received by the assessee in each of the two assessment years 1975-76 and 1976-77 on deposits made by it with the banks was taxable as its income under section 56 of the Income-tax Act, 1961, and whether only expenditure laid out or expended wholly and exclusively for the purpose of earning the interest income is to be allowed to be deducted therefrom?"
2. The assessee is Rajpath Club Limited and the question involved in this reference pertains to the assessment years 1975-76 and 1976-77. The assessee-club is incorporated as a company and its main objects are, inter alia, maintaining and carrying on a club house or houses with all usual or suitable accommodation and conveniences and to promote and provide all facilities for sports and games. In 1974 and 1975, the assessee derived interest income of Rs. 11,638 and Rs. 24,492, respectively, on the mounts deposited by it in its accounts in the banks. The question pertains to the said interest income.
3. Admittedly, the first part of the aforesaid question is covered by the decision of this court in the case of Sports Club of Gujarat Ltd. v. CIT [1988] 171 ITR 504. While dealing with similar facts and after considering various contentions raised by the parties, the court has held that the assessee's income from interest was not from a mutual activity and as such it was exigible to tax. The relevant observations are as under (at page 512) :
"We now revert to the question whether the income derived by way of interest on fixed deposits from banks is exigible to tax notwithstanding the finding that the principle of mutuality applies to the assessee-club. We have already pointed out earlier that one of the essentials of mutuality is that the contributors to the common fund are entitled to participate in the surplus, thereby creating an identity between the participators and the contributors. Once such an identity is established, the surplus income would not be exigible to tax on the principle that no man can make a profit out of himself. However, as pointed out earlier, the objects clause in the memorandum and articles of association empowers those in the management of the assessee-club to invest and deal with moneys of the club not immediately required in such manner as may from time to time be determined by them. Under this clause, the investment need not be confined to investment by way of fixed deposits with banks. It can take any other form or shape, such as investment in shares, real estate, etc. When income is derived from such investment, whether by way of interest, dividend or rent, it is derived from a third party and is not by way of contribution from the members of the club. We have also noticed that clause (vii) of the memorandum and articles of association provides that in the event of winding up or dissolution of the club, if there remains any surplus after satisfying all the debts and liabilities, the same shall be paid or distributed amongst the members in equal shares."
4. After discussing the matter further, the court finally held that the income received by the assessee-club by way of interest is exigible to tax.
5. With regard to the second part of the question, in our view, under section 57(iii) of the Act, any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is required to be deducted while computing the income from other sources.
6. In this view of the matter, the question is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
7. In the result, the reference stands disposed of accordingly with no order as to costs.