Gujarat High Court
Sports Club Of Gujarat Ltd. vs Commissioner Of Income-Tax on 8 October, 1987
Equivalent citations: [1988]171ITR504(GUJ)
Author: A.M. Ahmadi
Bench: A.M. Ahmadi
JUDGMENT A.M. Ahmadi, J.
1. The assessee, the Sports Club of Gujarat Limited, Ahmedabad, a club incorporated as a limited company on January 18, 1963, limited by guarantee, has the following as its main objects set out in the memorandum and articles of association :
"(a) To encourage and promote the game of cricket and other games and sports.
(b) To lay our any ground for playing the game of cricket and for other games and sports and for other purposes of the club and to provide pavilions, refreshment rooms and other conveniences in connection therewith, and with a view thereto, purchase, lease or otherwise acquire land at such price or rent and for such period and upon such terms and conditions as may seem expedient.
(c) To afford its members all the usual privileges, conveniences and accommodation of a residential club....
(i) To raise money by subscriptions and grant any rights and privileges to subscribers....
(m) To hire and employ secretaries, clerks, managers, coaches, professionals, umpires, scorers, referees, servants and workmen and pay them and other persons in return for services rendered to the club, salaries, wages, bonus, gratuities and pensions.
(o) To invest and deal with moneys of the club not immediately required in such manner as may from time to time be determined."
2. The other relevant clauses referred to in the course of proceedings before the tax authorities below are clauses (4), (6) and (7) which read as under :
"(4) The income and property of the club, wheresoever derived shall be applied solely towards the promotion of the objects set forth herein and no portion thereof shall be paid by way of dividend, bonus or profits to any of the members, provided that nothing herein contained shall prevent the payment in good faith of remuneration or fees to members for services actually rendered to the club.
(6) Every member of the club undertakes or guarantees to contribute to the assets of the club, in the event of the same being wound up during the time he is a member or within one year afterwards, for payment of the debts and liabilities of the club contracted before the time at which he ceases to be a member, and of the costs, charges and expenses of winding up the same and for adjustment of the rights of the contributories amongst themselves, such amount as may be required not exceeding one rupee.
(7) If, upon the winding up or dissolution of the club, there remains after the satisfaction of all debts and liabilities, any property whatsoever, the same shall be paid to or distributed among the members in equal shares."
3. The classification of members as per the articles of association is (a) donor members; (b) patron members; (c) life members; (d) ordinary members; (e) temporary members; and (f) honorary members.
4. The relevant assessment years are 1966-67 to 1960-70. During the said relevant years, the assessee-club claimed that the income derived by it was exempt by virtue of section 10(23) of the Income-tax Act, 1961 (hereinafter called "the Act"). The Income-tax Officer did not agree with this contention and relying on the decision of the Supreme Court in CIT v. Kumbakonam Mutual Benefit Fund [1964] 53 ITR 241, held that there was no identity between the contributors and the participants and hence the principle of mutuality could not be invoked in the facts of the case. He accordingly brought to tax a sum of Rs. 34,391 for the assessment year 1966-67 and Rs. 78,620 for the assessment year 1967-68. However, for the assessment year 1968-69, the Income-tax Officer determined the loss at Rs. 14,436 and allowed the same to be carried forward while for the assessment year 1969-70, he determined the taxable income at Rs. 12,470.
5. Being aggrieved by this order, the assessee carried the matter in appeal before the Appellate Assistant Commissioner who rejected the claim of the assessee for exemption under section 10(23) of the Act. The Appellate Assistant Commissioner next considered the question whether the income was exempt from tax on the general principle of mutuality as well as under sections 28(iii) and 44A of the Act. The Appellate Assistant Commissioner came to the conclusion that the general principle of mutuality was clearly applicable to the assessee's case and consequently held that the surplus arising out of its activities would be outside the tax net. Except for a small part of the income derived from non-members by way of subscriptions and charges, he held the rest of the income exempt from tax on the ground of mutuality. Thereupon, he directed the Income-tax Officer to determine the income from non-members and bring the same to tax. Next, the Appellate Assistant Commissioner examined the question of taxability of income from interest on fixed deposits and held that the income was taxable subject to deduction of deficiency from the interest income and computed the taxable income of the assessee. The result of this view taken by the Appellate Assistant Commissioner was that the assessments for the years 1968-69 and 1969-70 were required to be enhanced while the appeals in respect of the assessment years 1966-67 and 1967-78 had to be partly allowed.
6. Both the Revenue and assessee were dissatisfied with the order passed by the Appellate Assistant Commissioner. Both approached the Income-tax Appellate Tribunal in appeal. The Tribunal, after formulating the points for determination, examined the question mutuality in the light of certain decisions, namely, New York Life Insurance Company v. Styles [1889] 2 TC 460 (HL); CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC); CIT v. Kumbakonam Mutual Benefit Fund [1964] 53 ITR 241 (SC); CIT v. Merchant Navy Club [1974] 96 ITR 261 (AP) and CIT v. Wheeler Club Ltd. [1953] 49 ITR 52 (All) and came to the conclusion that the income of the club assessable under the head "Profits and gains of business" would not be eligible to tax on the principle of mutuality since the contributors and the participants represented one identical body. It, however, rejected assessee's contention the entire surplus should be exempt from tax on the ground of mutuality. Relying on the decision in Wheeler Club's case [1963] 49 ITR 52 (All), it held that the principle of mutuality would govern the surplus arising to the club which would otherwise be taxable under the head "Profits and gains of business or profession" but not income from interest which was earned on fixed deposits with banks made by the club. It next considered the question regarding permissible deduction in computing the income from interest and observed that section 57(iii) of the Act permits deduction of expenditure other than capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning the income from other sources and accordingly allowed a deduction of 10 per cent of the gross receipts from interest. Dealing with the contention based on sections 28(iii) and 44A of the Act, the Tribunal observed that these provisions were not applicable in the facts and circumstances of the case. It accordingly held that income derived by way of interest on fixed deposits minus 10 per cent was eligible to tax.
7. The assessee, feeling aggrieved by the view taken by the Tribunal, sought a reference under section 256(1) of the Act. The Tribunal has drawn up a statement of the case and has referred the following points for determination by this court :
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in rejecting the assessee's claim for allowing the entire expenditure incurred in all the activities as deduction from the assessee's taxable income ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the income from interest was not the result of mutual activity and as such eligible to income-tax ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that income from interest was not income arising from normal club activities and as such the expenditure incurred on the club activities was not deductible from interest income ?"
8. Generally speaking, when a mutual concern has surplus income, it cannot be considered as income under the Act, for no man can make a profit out of himself. One of the essentials of the concept of mutuality is that the contributors to the common fund are entitled to participate in the surplus thereby creating an identity between the participants and the contributors. Styles [1889] 2 TC 460 (HL) is a leading case on the subject which shows that when there is complete identity between the participators and contributors, the surplus cannot be regarded as profits. "The cardinal requirement is that all the contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund; in other words, there must be complete identity between the contributors and the participators" observed Lord Macmillan in Municipal Mutual Insurance Ltd. v. case of Merchant Navy Club [1974] 96 ITR 261 (AP) approved and explained this principle by pointing out that if this identity is shown, it is not necessary that each member should have contributed to the common fund or that each member should have participated in the surplus. In Royal Western India Turf Club Ltd. [1953] 24 ITR 551 (SC), the Supreme Court pointed out that the club which was an incorporated company was carrying on its own business and was releasing money from members and non-members at the same rates and was extending identical services and facilities to both members and non-members alike though in separate enclosures and could not, therefore, be regarded as a mutual concern to be out of the tax net. In the facts of the case, the Supreme Court held that the principles of Styles' case [1889] 2 TC 460 (HL) cannot apply to an incorporated company which carries on the business of horse racing and releases money both from members and non-members for the same consideration, namely, by the giving of the same or similar facilities to all alike in the course of one and the same business carried on by it. However, it is not difficult to conceive of cases where one and the same concern may indulge in activities which are partly mutual and partly non-mutual. The surplus accruing to a members' club from the subscriptions and charges received from members cannot be said to be income within the meaning of the Act but the question here is whether the interest income received on the investment of the unutilised surplus can be brought to tax. We have already noticed while stating the main objects of the company that it has the freedom to invest and deal with the moneys of the club not immediately required in such manner as may be determined from time to time by those in charge of the management. Indisputably, the unutilised surplus in the hands of the management came to be deposited with banks as fixed deposits and the assessee-club received interest income therefrom during the relevant assessment years. While the Tribunal came to the conclusion that income assessable under the head "Profits and gains of business or profession" would not be exigible to tax on the principle of mutuality, since there was complete identity between the contributors and the participators, it held that income derived by way of interest on the fixed deposits minus 10 per cent allowed under section 57(iii) was exigible to tax. It is this decision of the Tribunal which was seriously questioned before us by counsel for the assessee.
9. The object of the Act is to tax "income". Section 2(24) defines "income". It is an inclusive definition and not an exhaustive one. Clause (vii) there of expressly includes profits and gains of any business of insurance carried on by a mutual insurance company or by a co-operative society. It is in the nature of an exception to the general rule of mutuality. Next, under clause (v) of section 2(24), any sum chargeable under section 28(iii) is deemed to be income. Thus, income derived from a trade, professional or similar association from specific services performed for its members is chargeable under the head "Profits or gains". The idea clearly is to tax the surplus arising from services rendered by such associations to its members which would otherwise have been outside the tax net. However, since a social club like the assessee is not a trade, professional or similar association referred to in section 28(iii), this clause can have no application. In fact, it was not argued by counsel for the assessee that the assessee answers the description of an association referred to in section 28(iii) of the Act. That is also the finding of the Tribunal which is not assailed before us. We then come to section 44A which provides that where receipts by a trade, professional or similar association (other than an association or institution referred to in section 10(23) from its members' subscriptions or otherwise, fall short of the expenditure incurred by the association for protection or advancement of the common interest of its members, the amount so falling short shall be allowed to be deducted in computing the income of the association assessable to tax. Section 10(23A) concerns professional associations and has not application to a social club like the assessee. However, in the case of such a professional association or institution also, income chargeable under the heads "interest on securities", "house property", income from specific services or dividend or interest on investment is not excluded. Under section 28(iii), income derived by a trade, professional or similar association from specific services performed for its members is chargeable to tax. Under section 10(23A), income other than income from interest on securities, house property, specific services rendered or by way of interest or dividends derived from its investments has to be exclude. Section 44A excludes an association or institution referred to in section 10(23A) from its purview, presumably because it desired to extend the benefit only to those associations the income whereof was chargeable under section 28(iii) and not to those associations which were given the benefit of deduction under section 10(23A). In the circumstances, we find it difficult to accede to the submission of learned causal for the assessee that the words "other than an association or institution referred to in clause (23A) of section 10" have the effect of enlarging the meaning of the expression "similar association" so as to include a social club like the assessee also. Counsel contended that while expression "similar association" used in section 28(iii) may be considered ejusdem gainers and be given a narrow connotation, the same expression used in section 44A when read in the context of the words "other than an association or in institution referred to in clause (23A) of section 10" must receive a wider meaning so as to include associations or social clubs like the assessee. We are afraid we cannot accept this submission made by the assessee's counsel.
10. As pointed out earlier, section 44A which begins with a non obstinate clause applies to any trade, professional or similar association and but for the use of the words "other than an association or institution referred to in clause (23A) of section 10", even the professional associations referred to in section 10(23A) would have derived the advantage of section 44A. It is, therefore, clear that the said expression is used so as to carve out the professional associations referred to in section 10(23A) from the term "professional association" employed in section 44A of the Act. In other words, the intention of the Legislature was to give the benefit of section 44A to all professional associations other than those referred to in section 10(23A) of the Act. We are, therefore, of the view that the said expression has the effect of merely limiting the body of professional associations to associations other than those mentioned in section 10(23A) of the Act. They are, therefore, clearly words of limitation not intended to enlarge the scope of the expression "similar association" beyond its meaning in section 28(iii) of the Act. We, are, therefore, in agreement with the view expressed by the Tribunal that the expression "similar association" used in section 28(iii) and section 44A of the Act is in parimateria and has the same content. Since it is conceded before us that the assessee-club cannot fall within the meaning of "similar association" used in section 28(iii) of the Act, we must also hold that since the same expression used in section 44A has the same meaning, the assessee is not entitled to the benefit of section 44A of the Act.
11. We now revert to the question whether the income derived by way of interest on fixed deposits from banks is exsigible 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, divident 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. If the income derived from investments over a period of time is added to the surplus, there can be no doubt that when the surplus is distributed, a component of return on investment would go to the members in equal shares. This component of return which the members will receive will not be by way of plough back of their own contributions by way of fees, etc., to the club. An association which receives such income can be said to be indulging in both mutual activity as well as non-mutual activity. That is why in CIT v. Madras Race Club [1976] 105 ITR 433 (Mad), it was observed that the application of the principle of mutuality is not destroyed by the presence of transactions which are non-mutual in character. The principle of mutuality can in such cases be confined to transactions with members. The two activities can in appropriate cases be separated and the profits derived from non-members can be brought to tax. In Carlisle and Silloth Golf Club v. Smith [1912] 6 TC 48 (KB), the golf club in question which was admittedly a bona fide members' club was bound, under a clause in its lease, to admit non-members to play on its course on payment of green fees to be fixed by the lessors but not to be below a minimum fixed in the lease. It was held that the club for the purpose of income-tax was carrying on a concern or business which was capable of being isolated and defined and in respect of which it received remuneration which was assessable. This view was affirmed by the Court of Appeal, vide Carlisle and Silloth Golf Club v. Smith [1913] 6 TC 198 (CA). In Automobile Association of Bengal v. CIT [1968] 69 ITR 878 (Cal), the association, a mutual concerns run on no profit basis, published a monthly magazine for the benefit of its members. The Association received advertisements from non-members as well as members and charged for the publication thereof. The association contended that advertisement charges received from members were not taxable as income. Alternatively, it was contended that the entire cost of production of the magazine should, in any event, be deducted in computing the income from advertisement. The tax authorities overruled both the contentions and treated the advertisement charges received from members as assessable income and allowed only a part of cost of production to be set off against the advertisement receipts. On a reference, the High Court held that the profit earned by the association went to increase the funds of the association and benefits out of the same came to the members qua members, but not qua contributors or advertisers. It found that since the money was collected by the assessee-association, by way of advertisement charges, from a certain number of members, but the profit made therefrom was not distributed amongst them as advertisers, there was absence of mutuality and this made the profit the income of the assessee-association and taxable as such. From the above discussion, it seems clear to us that the income received by the assessee-club by way of interest is exigible to tax.
12. It was lastly argued by counsel for the assessee that the investment of the unutilised surplus in fixed deposits was merely incidental to the main objects of the club and, therefore, the income from interest received from the banks on the fixed deposits could not be brought to tax. In support of this contention, considerable reliance was place on the following observation found at page 696 in IRC v. Westleigh Estates Co. Ltd. [1925] 12 TC 657 :
"I think the proper mode of regarding the company in the present case is a convenient instrument or medium for enabling the members to conduct a social club the objects of which are immune from every taint of commerciality, the transactions of sale and purchase being merely incidental to the attainment of the main object."
13. These observations must be read in the context of the facts of the case. There a company was incorporated as a company limited by guarantee. Its main object was to promote social intercourse between gentlemen connected (directly or indirectly) with literature, art, music, drama, scientific and liberal professions, sports and commerce and with a view thereto to establish, maintain, and conduct a club of a non-political character for the accommodation of members of the club and their friends, and to provide a club house and other conveniences, and generally to afford to members and their friends all the usual privileges, advantages, convenience and accommodation of a club. Incidentally, certain other things which are usually done by social clubs, for example, buying, preparing and selling of provisions, was included in the memorandum. The income and property of the club were to be applied towards promotion of the objects of the club as set out above. All the members of the company were members of the club. No payment for provisions supplied in the club were taken from any person who was not a member thereof. In this background, the question arose whether the profits could be charged to tax and it is in this context that the above observation came to be made which only shows that the objects of the club should be immune from every taint of commerciality and this also applied to the transactions of sale and purchase which were being incidentally undertaken for the attainment of the main object of the club. The buying, preparing and selling of provisions which were incidental to the main object of the club was also limited to the members of the club and not extended to outsiders. This incidental activity was also, therefore, immune from the taint of commerciality. We are, therefore, of the opinion that the above observation on which considerable reliance was placed by counsel for the assessee cannot go the aid of the assessee.
14. In view of the above, we are of the opinion that all the three questions formulated by the Tribunal and referred to us must be answered in the affirmative, that is, in favour of the Revenue and against the assessee. The reference is disposed of accordingly with no order as to costs.