The principle of mutuality applies to a club which is incorporated as a company and which provides facilities to its members, and the surplus arising from such transactions is not taxable as business income or income from property.

SUHAS CHANDRA SEN, J.

( 1 ) THE two following questions of law have been referred to this court by the Tribunal under Section 256 (1) of the I. T. Act:"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the receipts of the assessee from the temporary and the honorary members on account of messing charges, for subscriptions and games could not be assessed to tax in its hands as income derived from a business ?.

( 2 ) WHETHER, on the facts and in the circumstances of the case, the Tribunal was right in holding that the income derived from rooms occupied by the members, permanent, temporary and honorary could not be assessed as income from property in the hands of the assessee ?"2. The assessment years are 1965-66 to 1970-71. The assessee is the Darjeeling Club Ltd. It was incorporated as a company limited by guarantee. It has three classes of members, viz. , (1) permanent, (2) temporary, and (3) honorary. The latter two classes of members are also entitled to the same privileges which the permanent members are entitled to except that they can neither vote nor can be elected nor be co-opted to any committee. It has a set of rooms fully furnished which are let out to the members. It provides refreshments and meals to the members and their guests. It has also a bar where drinks are supplied to the members and their guests. The club charges for refreshments, meals and drinks supplied and also charges rent for the rooms.

( 3 ) BEFORE the ITO, the case of the assessee was that the club was a mutual concern and the surplus accruing to it could not be regarded as income. It was further urged that there could not be any difference between the permanent and the temporary members as all the members enjoyed the same benefits and were contributors and participators. The ITO was of the view that if some of the contributors to the funds were not participators in the surplus or if some of the participators in the surplus were not contributors to the common fund, the profit of the association would be assessable to tax. He found that the tourists who were taken as temporary members were contributors, but they were not participators in the surplus. He held that the temporary members did not even participate in the surplus created on account of their own stay, not to speak of participating in the surplus of the club. Thus, he held that the income from the receipts from the

temporary members was taxable. He found that there was no rational basis for allocating only small fraction of food and lodging charges received from the guests for stay to the dormitory account. The ITO allocated 60 per cent. of the charges both from the permanent and temporary members for messing and 40 per cent. for lodging. He further held that the profit attributable to the receipts from the temporary members should be taxed; The income from dormitory account was considered by him under the head "income from house property". Thus, 40 per cent. of the charges from both the permanent and temporary members were taken as income from property and after allowing statutory deduction, he taxed the balance. He also taxed 60 per cent. of the charges received from the temporary members as business income. 3. The assessee preferred appeals before the AAC. The AAC held that the income of the club had to be computed by including (i) profits and realisations received from the temporary and special members, (ii) income from premises let out to the hospital, and (iii) income from dividend and securities.

( 4 ) THE assessee as well as the ITO preferred appeals to the Appellate Tribunal. The Tribunal held that the club provided facilities to its members by supplying food, refreshments and beverages on payment. The supplies made to its members by the club could not be treated as sales. The club did not trade with its members. The club was not a trading association. The permanent, temporary and honorary members were contributors to the co

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