Orissa High Court
Cuttack Club Pvt. Ltd. vs Commissioner Of Income-Tax on 26 February, 1992
Equivalent citations: [1992]196ITR407(ORISSA)
Author: A. Pasayat
Bench: A. Pasayat
JUDGMENT A. Pasayat J. 1. The following questions have been referred to this court under Section 256(1) of the Income-tax Act, 1961 (in short "the Act"), by the Income-tax Appellate Tribunal, Cuttack Bench (in short "the Tribunal"), for adjudication ; "(1) Whether the Tribunal was right in holding that the assessee is a mutual concern ? (2) Whether the learned Tribunal was justified in holding that the purported income from the house property was not available to be set off against the losses incurred by the club ?" 2. The background facts as depicted in the statement of the case drawn up by the Tribunal are to the following effect. 3. Cuttack Club Pvt. Limited (hereinafter referred to as "the assessee"), a limited company, was incorporated to take over the assets and liabilities of the erstwhile unincorporated association known as the Cuttack Club, with the object, inter alia, to offer to its members all the usual privileges, advantages, conveniences and accommodation of a club. The memorandum of association in Clause 4 provides for contribution by every member to the assets of the company in the event of winding up, of sums not exceeding Rs. 100, while Clause 5 thereof provides for payment of surplus or distribution among the existing members in equal shares. The articles of association provide for rules and regulations for election of members, entrance fees and donation payable by members and the monthly subscription, etc., besides enumerating powers of the various committees formed. The assessee filed its return of income for the assessment year 1976-77 disclosing a loss of Rs. 5,330. The loss was arrived at by setting off the loss incurred in various activities or amenities provided by the club against the gross house rent received to the extent of Rs. 13,140. Put differently, the loss from activities of the club was set off against the income under the head "House property". The Assessing Officer was of the view that the principle of mutuality applied to the assessee-club and any surplus was not to be treated as income from business as the transactions were limited to the members of the club only. However, he was of the view that the income from property was not covered by the principle of mutuality and, therefore, the same was to be assessed separately. The income was assessed at Rs. 11,370. In appeal, the view of the Assessing Officer was upheld by the Commissioner of Income-tax (Appeals). The assessee carried the matter in further appeal before the Tribunal. The primary stand of the assessee before the Tribunal was that it having not claimed the principle of mutuality, the approach of the taxing authorities was not correct. Alternatively, it was urged that, even if the principle of mutuality is applied, the income from house property should also be exempted. In this regard, it was submitted that letting out of the property of the club was not business, but was incidental to the carrying out of the activities of the club. The Revenue's stand, on the contrary, was that the principle of mutuality applied to the case of the assessee against surplus having arisen therefrom does not constitute income under Sub-section (2) of Section 24 of the Act (sic). It was also pleaded that, as regards the income from house property, the principle of mutuality was lost as the contributors were not members of the society. The Tribunal did not accept the contentions raised on behalf of the assessee and affirmed the conclusions of the taxing authorities. It referred to the various factual aspects borne out by the record and held that there was complete identity between the participators and the contributors so far as the several activities carried on or amenities provided were concerned and that, therefore, the asses-see was a mutual concern. It also observed that there was no material to warrant that the assessee-club had carried out these activities on a commercial basis so as to make the surplus business income. The identity of the contributors and the participators was completely lost, according to the Tribunal, so far as the income from house property is concerned, and, therefore, so far as the conclusions of the taxing authorities were concerned, they were affirmed. 4. The assessee moved the Tribunal for referring four questions to this court. On consideration of the materials on record, the Tribunal held that the questions referred to above were referable to this court and, accordingly, the reference has been made. 5. According to learned counsel for the assessee, the purpose and object of an institution determines the character of a receipt. The dominant purpose of the institution being backed by mutuality, the other objects, which by themselves may not have that character, being merely ancillary or incidental to the primary or dominant purpose, do not change the nature of the receipt and, therefore, from whatever source they may have accrued, the receipt of the same is tax-free. The element of assessability is not there. Strong reliance is placed on a decision of the Supreme Court in the case of CIT v. Bar Council of Maharashtra [1981] 130 ITR 28. It is also submitted that this submission is being made by accepting, for the sake of argument, that the principle of mutuality applied. Learned counsel for the Department, however, submitted that the principle of mutuality having applied only so far as the activity of the club is concerned and the surplus having constituted income under Section 24(2) of the Act, so far as the income of the house property is concerned, the principle of mutuality was lost as the contributors were not members of the club. 6. We shall first deal with the question so far as the assessee's plea that there was no mutuality is concerned. The first important decision on the question of taxability or otherwise of the mutual associations is in Styles v. New York Life Insurance Co. [1889] 2 TC 460 (HL). The basic conclusion arrived at in Styles' case [1889] 2 TC 460 (HL) was that, if the contributors to such associations as well as the participants in the surplus arising out of the business carried on by the association happen to be the same, such an association is known as a mutual association and the income from the same will not fall within the ambit of the charging provisions of any taxing statute, the fundamental concept being that no one can trade with himself. No person can trade with himself and make an assessable profit. If, instead of one person, more than one combine themselves into a distinct and separate legal entity for the purposes of rendering services to themselves or for the supply of refreshments, beverages, entertainment, etc., by overcharging themselves, the resulting surplus is not assessable to tax if the surplus is to be refunded to the members. They are contributors to the common fund, and the participators in the surplus must be an identical body. What is required is that the members as a class must be able to participate in the surplus. Whether the surplus is paid back to the members in cash or is put to reserve with the club for its development and for providing better amenities to its members is immaterial. When a body of individuals is incorporated into a company or formed into a registered society, what is essential is that it should not have dealings with an outside body which results in a surplus. The participation of the members in the surplus must be in their character as contributors to the common fund or as consumers, and not as shareholders getting dividends on their share amount or as debenture-holders earning interest. The apex court in CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC) arid in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax [1948] 16 ITR 270 (PC) recognised the basis of exemption in case of mutual concerns as highlighted in Styles' case [1889] 2 TC 460 (HL). The basis for exemption as indicated in the aforesaid cases is that (i) the identity of the contributors to the fund and the recipients from the fund ; (ii) 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 (iii) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves. The court has to scrutinise the facts and circumstances with a view to ascertaining whether the three conditions specified in English and Scottish Joint Cooperative Wholesale Society Ltd.'s case [1948] 16 ITR 270 (PC) have been satisfied. As observed in Dublin Corporation v. M' Adam [1887] 2 TC 387 (Exch. Div. (Ireland)) (Eng. Case), if the two parties are identical, there can be no trading. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporated themselves, as a legal entity to do it for them makes no difference. (See Thomas v. Richard Evans and Co. (1927) 1 KB 33 ; 11 TC 790 (Eng. Case) ; CIT v. Karachi Chambers of Commerce [1939] 7 ITR 575 (Sind) and Sharkey v. Wernher [1956] 29 ITR 962 (HL)). The principle that a person cannot make profit out of himself and similarly an association cannot make profit out of itself does not prevent an association from doing business with some of its members because then the association is not doing business with itself, but with a different entity. In Royal Western India Turf Club Ltd.'s case [1953] 24 ITR 551, the Supreme Court held that 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. It cannot, however, 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. In the above premises, the conclusions of the Tribunal that the assessee is a mutual concern are irreversible. The first question is answered accordingly. 7. So far as the second question is concerned, the income from the house property has not been the outcome of any mutuality. Identity of the contributors and the participators is totally absent on the mutuality aspect. Even though the income from house property is utilised for the benefit and advantage of the members, yet it cannot be excluded from the arena of taxation on the concept of mutuality. The application of income is of no consequence while determining the question as to its taxability. Even though the memorandum and articles of the club authorised the letting out of the property of the club, the receipt giving rise to the income was not out of the contributions by the members of the club. Anything which can properly be described as income is taxable under the Act unless expressly exempted. The inclusive definition of "income" in Section 2(24) amplifies this aspect. In view of our conclusion, the activities of the club resulting in any surplus or deficit was excluded from the computation of income by applying the doctrine of mutuality. So far as the house property income is concerned, as indicated above, the mutuality character is totally absent. The second question is, accordingly, answered. The Tribunal was, therefore, justified in its conclusion that the income from the house property was not available to be set off against the loss incurred by the assessee. 8. We answer both the questions in the affirmative, in favour of the Revenue and against the assessee. No costs. S.K. Mohanty, J.
9. I agree.