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PATNA HIGH COURT
S.B.Sanyal, G.C.Bharuka and Aftab Alam JJ.
Commissioner Of Income Tax
Versus
Ranchi Club Limited
Taxation Case No. 54 of 1980 ;
Decided On : SEPTEMBER 24, 1991
INCOME TAX - Whether the assessee-club is a mutual concern - Whether the income derived by the assessee-club from its house property let to its members and their guests is not chargeable to tax - Whether the income derived by the assessee-club from sale of liquor, etc., to its members and their guests is not taxable in its hands.
Fact of the Case:
The assessee, Ranchi Club Limited, is a company incorporated under the Indian Companies Act, 1913. It is limited by guarantee. The assessee-club filed its return showing Rs. 6,030 as its income under the head "House property" representing the income arising out of gross rent and reservation charges received by it from persons other than members. The Income-tax Officer, while assessing the income, also included the amount received by the assessee even from its members on account of rent from the club property and the receipts on sale of liquor, etc., to its members and their guests.
Finding of the Court:
The court held that the assessee-club is not a mutual concern and, as such, even the receipts from its members and their guests on account of rent and sale of liquor, etc., are liable to be taken into account for computation of the taxable income under the Act.
Issues: 1. Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the assessee-club is a mutual concern? 2. Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from its house property let to its members and their guests is not chargeable to tax? 3. Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from sale of liquor, etc., to its members and their guests is not taxable in its hands?
Ratio Decidendi: The court held that the principle of mutuality cannot have any application in respect of transactions held with "temporary members" because they are neither obliged to contribute to the assets of the company nor do they give any guarantee for payment of the debts and the liabilities of the company. The court further held that the principle of establishing complete identity between the contributors and the participators will apply only in respect of contributions made by the members.
Final Decision: The court answered all the three questions referred to it in the affirmative and against the Department.
G.C.Bharuka, J.
1. This reference has been made by the Income-tax Appellate Tribunal, Patna Bench, Patna, under the provisions of Sec. 256(1) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act" only), seeking the opinion of this court on the following questions of law :
"(i) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the assessee-club is a mutual concern ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from its house property let to its members and their guests is not chargeable to tax ?
(iii) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that the income derived by the assessee-club from sale of liquor, etc., to its members and their guests is not taxable in its hands ?"
2. The assessee, Ranchi Club Limited, is a company incorporated under the Indian Companies Act, 1913 . It is limited by guarantee. The memorandum of association of the assessee discloses that its main object is to provide a club house and other conveniences and accommodation for the use of its members and their friends. Clauses (4) and (5) of the memorandum are material for the determination of the issues involved since these provide for the contribution of the members to the common fund of the club, guarantee towards debts and liabilities and upon winding up, their participation in the surplus. The said clauses read as under :
"4. Every member of the company undertakes to contribute to the assets of the company, 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 company 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 the adjustments of the rights of the contributories amongst themselves such amounts as may be required not exceeding Rs. 50.
5. 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 of the club in equal shares."
3. A reading of the articles of association reveals that, apart from the concept of "member" envisaged under the memorandum, it has created one more class described as temporary members, honorary members, lady members and patrons (for convenience hereinafter to be referred to as "temporary members"). Article 2 of the articles provides that only permanent members of the club shall be deemed to be the members of the company. Article 8 of the articles provides that the temporary members shall not be deemed to be members within the meaning of Clauses (4) and (5) of the memorandum. Article 9 of the articles provides that temporary members shall not be entitled to vote on a ballot or attend or vote at general meetings or have any voice in the management of the club.
4. The present reference relates to the assessment year 1977-78. For this period, the assessee had filed its return showing Rs. 6,030 as its income under the head "House property" representing the income arising out of gross rent and reservation charges received by it from persons other than members. But the Income-tax Officer, while assessing the income, also included the amount received by the assessee even from its members on account of rent from the club property and the receipts on sale of liquor, etc., to its members and their guests. On appeal, the Appellate Assistant Commissioner deleted the additions made by the Income-tax Officer on the ground that the Tribunal in earlier assessment years, namely, 1972-73, 1973-74 and 1974-75, on identical facts had held that since the assessee-company is a "mutual concern", the receipts by the company from its members and their guests cannot be subjected to assessment. In the appeal preferred by the
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