COMMISSIONER OF INCOME TAX Vs. TRIVANDRUM CLUB

JUDGEMENT

(1.) The Income-tax Appellate Tribunal, Cochin Bench on a direction given by this Court in OP. 7449 of 1999 has referred the following question of law for our opinion under Section 256(2) of the Income-tax Act.

(2.) We may first examine as to whether Commissioner of Income Tax v. Trivandrum club case (supra) would apply so far as the assessment year 1988-89 is concerned. In Trivandrum club's case this Court was dealing with the assessment year 1974-75. In that year assessee had claimed exemption of the income on the doctrine of mutuality. The ITO rejected the plea and held that the rules and byelaws of the club enabled it to allow nonmembers to enjoy the facilities of the club. CIT (Appeals) however, noticed that the club had not allowed any person other than a member to occupy the club during the year ending December 31, 1973 and so the facilities available in the club were used exclusively by the members. Tribunal also placed reliance on the statement of the secretary and held that during the relevant period no nonmember was allowed to occupy any room of the club. The court therefore held that the assessee is entitled to exemption under the doctrine of mutuality. It is worthwhile to refer a portion of the judgment which is extracted hereunder:

(3.) The application of doctrine of mutuality was considered by the Apex Court in C.I.T. v. Bankipur Club Ltd. . The court held in order to apply the doctrine of mutuality there must be complete identity between the contributors and the participators. The court quoted with approval the reasoning of the Supreme Court in C.I.T. v. Royal Western India Turf Club Ltd. , C.I.T. v. Kumbakonam Mutual Benefit Fund Ltd. and the Doctor's Cave Bathing Club v. I.T.C. (1971)3 All ER 1185 (PC) and held 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 nonmembers, 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 earned 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 transaction entered into with the members or nonmembers alike is a trade/business/transaction and the resultant surplus is profit-income liable to tax. The court held that there must be complete identity between the contributors and the participators. The above mentioned decision was followed by the apex court in Chelmsford Club v. C.I.T. (2000) 243 ITR 89. The court held that under the Income-tax Act, 1961, 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. The law recognises the principle of mutuality excluding the levy of income-tax the income of such business to which the above principle is applicable. In that case the apex court held that the assessee's business was governed by the doctrine of mutuality.