IMPORTANT POINT
Mutual clubs are entitled to exemption for the receipts or surplus arising from the sale of drinks, refreshments etc. or amounts received by way of rent for letting out the buildings or amounts received by way of admission fees, periodical subscriptions and receipts of similar nature, from its members as the amounts received were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective clubs, and such surplus-receipts cannot be said to be income for the purposes of the Income Tax Act.

Headnote:(i) Income Tax Act, 1961-Members club-Non profit companies-They claimed exemption on their surplus receipts on ground that they are a species of mutual undertaking-Receipts or surplus arising from sales of drinks, refreshment etc.-Amounts received by way of rent for letting out buildings- Amounts received by way of admission fee, periodical subscriptions etc. etc. from members - Whether assessees-mutual clubs are entitled to exemption on these receipts ?-(Yes)-Services offered on these counts were not done with any profit motive-They were not tainted with commerciality-Facilities offered only as a matter of convenience for use of members (and their friends, if any, availing of facilities occasionally)-Receipts for various facilities extended by clubs to its members-Not a trading activity -Surplus-excess of receipts over expenditure-Not income for purposes of the Act.
       Held : In all these cases, the Appellate Tribunal as also the High Court have found that the amounts received by the clubs were for supply of drinks, refreshments or other goods as also the letting out of building for rent or the amounts received by way of admission fees, periodical subscription etc. from the members of the clubs were only for/towards charges for the privileges, conveniences and amenities provided to the members, which they were entitled to as per the rules and regulations of the respective Clubs. It has also been found that different clubs realised various sums on the above counts only to afford to its members the usual privileges, advantages, conveniences and accommodation. In other words, the services offered on the above counts were not done, with any profit motive, and were not tainted with commerciality. The facilities were offered only as a matter of convenience for the use of the members. (and their friends, if any, availing of the facilities occasionally). In the light of the above findings, it necessarily follows that the receipts for the various facilities extended by the clubs to its members, as stated herein above, as part of the usual privileges, advantages and conveniences, attached to the membership of the club, cannot be said to be "a trading activity." The surplus-excess of receipts over the expenditure-as a result of mutual arrangement, cannot be said to be "income" for the purpose of the Act. (Para 14)
       (ii) Taxation-Law relating to Mutual trading or Mutual undertaking and a Members club .
       Held that in the case of "mutual society or concern" (including a "Members club"), there must be complete identity between the class of contributors and the class of participators. The particular label or form by which the mutual association is known, is of no consequence. (Para 7)
       Further 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 non-members, 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 carried 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 transactions entered into with the members or non-members alike is a trade/business/transaction and the resultant surplus is certainly profit-Income liable to tax. We should also state, that "at what point, does the relationship of mutuality end and that to trading begin" is a difficult and vexed question. A host of factors may have to be considered to arrive at a conclusion. "Whether or not the persons dealing with each other, is a "mutual club" or carrying on a trading activity or an adventure in the nature of trade", is largely a question of fact. (Para 15)

JUDGMENT

Paripoornan, J.-Special leave granted in SLP (C) Nos. 22644/94 and 2811/94.

2. This batch of 23 cases was posted together. That was so done on the basis that the same and identical point arises for consideration in all of them. On further verification, it turned out that in 7 appeals, the point that arises for consideration is little different. On the question arising in those appeals no arguments were advanced. So, the said seven appeals are de-linked, to be posted later for hearing.

3. For convenience sake, the 23 cases including seven appeals which are de-linked can be classified into 5 groups. Group-A : C.A. Nos. 854/858/86 Commissioner of Income-tax, Bihar v. M/s. Bankipur Club Ltd. Group-B : C.A. Nos. 505/92 and 3974/92 - Commissioner of Income-tax, Bihar-II v. Ranchi Club Ltd.; Group-C : C.A. No. 3382/97 (arising out of SLP (C) No. 22644/94 and C.A. No. 10194/95 - Commissioner of Income-tax, Bombay v. Cricket Club of India; Group-D: C.A. Nos. 1635/94, 1648-49/94, 2380-82/94 and C.A. No. 3383/97 (arising out of SLP (C) No. 2811/94) - Commissioner of Income Tax, Jalandhar v. Northern India Motion Pictures Association; Group-E : C.A. Nos. 4777-78/89, 4534/91, 8046/95, 1773 (NT)/92, 4303/95 and 3840/96 - Commissioner of Income Tax, Kanpur v. Cawnpore Club Ltd.

4. As stated earlier, the appeals coming within Group-E - CIT, Kanpur v. Cawnpore Club Ltd. (seven appeals) are de-linked and they will be posted separately to be heard on merits. We shall indicate the reason for this a little later.

5. We heard counsel. The following vital aspects should be borne in mind in adjudicating the question that arises for consideration in this batch of 16 appeals (covered by Groups A to D). The Revenue is the appellant in all the appeals. The respondents in all the appeals are "Members Clubs". They are also called "social action groups". They are all companies, registered under Section 25 of the Companies Act, 1956 - "non-profit companies". The respondents are assessees to income tax. They claimed exemption on their "surplus receipts" on the ground that they are "clubs" - a species of mutual undertaking, and do not carry on any "trade or business". They do not earn any profit. The income received by the clubs by extending facilities to non-members is not in issue in this batch of appeals. According to Revenue, even the surplus receipts of the clubs by affording facilities to its members, is "income" and so, taxable. That is the sole question arising for consideration of this batch of appeals.

6. Under the Income-tax Act (hereinafter referred to as the Act ) what is taxed is, the income, profits or gains earned or "arising", "accruing" to a person". The question is whether in the case of Members Clubs - a species of mutual undertaking - in rendering various services to its members which result in surplus, the club can be said to "have earned income of profits" In order to answer the question, it is necessary to have a background of the law relating to "Mutual trading" or "Mutual undertaking" and a "Members Club".

7. In Halsbury Laws of England, 4th Edition Reissue Volume 23 paras 161 and 162 (pages 130 and 132), the relevant law is stated thus :-

"Where a number of persons combine together and contribute to a common fund for the financing of some venture or object and will 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 association 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

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