ITO vs. Gymkhana Club (ITAT Chandigarh)

(i) In the above background, now we have to discuss as to whether the ‘Principe of Mutuality’ applies to the Club or not. It is revealed that originally the higher rank officials of the HUDA have created an Association in the name of assessee Society i.e. Gymkhana Club, Panchkula. It was resolved by them that certain high rank officials of the HUDA will be only will look after the management of the Society. The membership was also open to the persons from public subject to the approval by the Executive Committee. It is also an admitted fact that only the members of the Club are entitled to enjoy the facilities of the Club. It is also an admitted fact that surplus is to be expended for the common benefit of the Club members or for carrying out the objectives of the Club. All the members of the Club enjoy the equal right so far as the utilization of the facilities of the Club or the common benefits of the members are concerned.

As held by the Hon’ble Supreme Court in the case of Banglore Club Vs. CIT (2013) 350 ITR 509 (SC) the ‘principal of mutuality, relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore, not subject to tax. The concept of Mutuality has been has been explained to define group of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purposes is said to be simply an increase of common fund and as such neither considered income nor taxable. In the light of the above principles, we have to decide as to whether the surplus accrued / collected during the year is taxable income of the assessee or the same is just the collection of the common fund to which Principle of mutuality applies.

(ii) The Hon’ble Supreme Court in the case of Bangalore Club (supra) has also discussed the nature and functioning of the mutual organizations. It has been observed that a common feature of mutual organization in general and of licensed Club in particular is that participators usually do not have property right to their shares in the common fund, nor they can sell their share. And when they cease to be members, they lose their right to participate without receiving a financial benefit from the surrender of their membership. A further feature of the licensed Club is that there are both membership fee and the price charged for club services are greater than their cost and further additional contributions. It is this kind of price and / or additional contributions which constitutes mutual fund. The nature, formation and functioning of the assessee Club before us also resembles to the characteristic and parameters of a mutual organization as discussed above. The only distinguishing feature in respect of the assessee Club is that the management and control of the Club vests in certain pre-authorized/pre determined persons according to their rank and status in the government organization HUDA (Haryana Urban Development Authority), which means that members of the Club do not enjoy equal rights so far as the management and decision making in Society is concerned. They also do not have voting rights to elect their representatives for running the management and affairs of the Club on their behalf, rather, the members in the Management Committee come by default because of their official position in HUDA. This being the position, now we examine as to whether the assessee club conforms to the parameters required of a mutual organization.

(iii) One of the point of views can be that the decision to appoint exofficio members was taken by the first members of the club at the time of its creation which also finds mention in the Memorandum of Association. The other members entering into the club have agreed to the aforesaid aims and objects, hence, it can be said to be a mutual decision of the members of the club to adopt such a procedure of appointing ex-officio members in the management committee. That the members may mutually agree to appoint any person or persons or to give responsibility to any of its members to run the day to day affairs of the club. Hence management of the club has nothing to do with the mutual status of the club. However this view has a rebuttal that if the members have a right to mutually take a decision to appoint any person/persons in the management, then the must got right to mutually take a decision to remove or discharge that person/persons from the management of the club. Right to appoint includes right to remove or discharge also. Now if we admit the plea that it is the mutual decision of the club members to give the responsibility of the management of the club to the high rank officers of HUDA, whether any right of reverse action that is to divest the officials of HUDA from the management of the club lies with the members of the club? The answer is no. We have gone through the memorandum of the association but have not found any clause giving any such right in particular or any other right in general to the members of the club in general. All the rights vests in the executive commit tee. The Board of Patron have the absolute powers in terms of taking decision pertaining to any matter relating to Club. They have veto power on the decision taken to any committee / body relating to the club. Under these circumstances, it can not be said that the appoint of management or vesting of all rights relating to the running of affairs of the club including taking financial decisions relating to the manner and items on which the surplus is to be applied. In general parlance, as we understand, the participation in the surplus includes not only the right to get common benefit out of surplus but also the right to participate in the decision making as to in what manner or on what item or services the surplus is to be applied. Having said so, we do not mean that the consent of each or every member is required to be taken, but it must come from the members as a class or by or through their representatives either elected or selected mutually by the members. In the case of the assessee club, the representatives who takes the decisions relating to the club are neither elected nor selected by the members of the club but they come by default as per the clause of the Memorandum of association. Even there is nothing provided in the Memorandum of association that members/ general body of the members have got any right to bring any change in any clause of the MOA. As discussed above, The Hon’ble Supreme Court in para 7 of the order in the case of ‘Banglore Club’ (supra) has observed that the concept of Mutuality has been explained to define group of people who contribute to a common fund, controlled by the group, for a common benefit. In the case of assessee club, though the contribution to common fund for a common benefit is present, however, we have our doubts, in view of the discussion made above, that it can in the real sense be said that the club is controlled by the group. Having said so, the next question comes as to whether the assessee Society falls short of a mutual organization, so far as the taxability of the income is concerned? As discussed above, all the contributors are the members of the Club. The surplus has to be expended for the mutual benefit and in carrying out the objects of the Club. The Revenue has not pointed out any profit motive so far as the collections, activities and contribution of the funds, activities run by the assessee Club and the participation in the funds is concerned.

(iv) No doubt, clause (iv) of the Memorandum of Association provides to invite non-members who are eminent persons of the society such as renowned artists, masters, sportsmen, cultural leaders, scholars, scientists and creative artists, to take advantage of the facilities offered by the Society. In our view that itself does not give any impression that inviting such members to enjoy the facilities of the Club has any profit motive. The facilities of the Club are not offered to non-members as a matter of practice but it is restricted only to the eminent persons of the society who are invited by the Club to avail the facilities of the Club. It is not the case of the Revenue that funds of the Club have been raised or collected with a profit element to the HUDA or to the official management who are ex-officio members of the Club. No doubt the participation in the surplus of the non-official members is restricted to the enjoyment and use of facilities of the Club and they are not entitled to participate in the decision making as to on which activity and in what manner funds are to be expended for the common benefit of the members or for carrying out the objects of the Club. Such a restriction though may be of some importance with the question as to the mutually equal rights in the management of Club if any such dispute arises inter se between the members. However, so far as the taxability of the surplus is concerned, the surplus funds cannot be said to be income of the Society as there is lack of business profit motive involved and the funds so collected have to be necessary expended for the common benefit of the contributors only. It has also been held time and again that when we speak of the contributions to the common fund and the participation in the surplus, that does not mean that each member should contribute to the fund or that each member should participate in the surplus but they have to be seen as a class of the persons who were contributing and are entitled to participate in the surplus. It is not the matter that the class may be diminished by persons coming out of the scheme or increased by others coming in. The taxation under the Income Tax Act is to be done on the receipts or the income of the society. As discussed above, though the assessee club may fall short of the definition of mutual organization in common parlance or understanding of the term, however, so far as the taxation of the surplus out of the contributions is concerned, the same cannot be said to be the income of the club, being a common fund collected for common benefit of the contributors only. So far as the winding up clause is concerned, the Ld. DR has stressed that on winding up, members are not entitled to share any surplus on the winding up. As discussed in earlier paras of this order, it has become a common feature of mutual organizations in general and licensed clubs in particular that on winding up the members are not entitled to the share in the surplus rather the whole of the surplus funds is decided to be spent on charity or given to some other organization having same or similar objectives. Hon’ble Supreme Court in Banglore Club’s case (supra) in para 15 of the judgement has observed as under:

“15. In short, there has to be a complete identity between the class of participators and class of contributors; the particular label or form by which the mutual association is known is of no consequence. Kanga & Palkhivala explain this concept in “The Law and Practice of Income Tax” (8th Edn. Vol. I, 1990) at p. 113 as follows: “…The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid.” The Madras, Andhra Pradesh and Kerala High Court have held that the test of mutuality does not require that the contributors to the common fund should willy-nilly distribute the surplus amongst themselves : it is enough if they have a right of disposal over the surplus, and in exercise of that right they may agree that on winding up the surplus will be transferred to a similar association or used for some charitable objects….”

(v) We further, taking clue from the observations of the Hon’ble Supreme Court in Banglore Club’s case (supra), may add here that sometimes the right to share in the surplus may lead to a conclusion of involvement of the motive of commerciality in the operation or working of such an organization resulting into denial of the benefit of mutuality. In this respect, the Hon’ble Supreme Court in ‘Banglore Club’ (supra) has referred to the British Common Law decisions in the case of ‘Styles (Surveyor of Taxes) Vs. New York Life Insurance Co’ (1889) 2 TC 460 and in the case of ‘Thomas Vs. Richard Evans & Co Ltd (1927) 11 TC 790 wherein it has been held that if profits are distributed to shareholders, the principle of mutuality is not satisfied. Further, in the case of ‘Commissioner of Income Tax, Madras Vs. Kumbakonam Mutual Benefit Fund Ltd’., AIR 1965 SC 96, the Hon’ble Supreme Court denied the exemption on different facts of the case before it from those of Styles case (supra) and denied the exemption because of the taint of commerciality, observing as under:-

“It seems to us that it is difficult to hold that Stylee’s case applies to the facts of the case. A shareholder in the assessee company is entitled to participate in the profits without contribut ing to the funds of the company by taking loans. He is enti tled tor received his dividend as long as he holds a share. He has not to ful fi l any other condi tion. His position is in no way dif ferent from a shareholder in a banking company, limited by shares. Indeed, the posi ton of the assessee is no different from an ordinary bank except that it lends money to and receives deposi ts from the shareholders. This does not by itsel f make its income any the less income from business within S.10 of the Indian Income Tax Act .”

(vi) The Hon’ble Supreme Court in ‘Bangalore Club’ (supra) has further observed in para 23 of the order that it is a difficult question of fact as at what point mutuality ends and commerciality begins. The Hon’ble Supreme Court has referred to the decision of the ‘CIT, Bihar Vs. Bankipur Club Ltd’., (1997) 5SCC 394., wherein it has been observed as under:- “at what point, does the relationship of mutually end and that of trading begin” is a difficult and vexed quest ion. 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 activi ty or an adventure in the nature of trade” is largely a quest ion of fact [Wilcock’s case – 9 Tax Cases 111, (p.132); C.A. (1925)(1) KB 30 at p.44 and 45] .”

In view of the above, there can not be said to be straight jacket formula to say that in every a mutual concern the members must be entitled to a share in the surplus. In the aforesaid case laws as discussed by the Hon’ble Supreme Court in Banglore Club’s case (supra), if the scheme or the mechanism of functioning of a mutual organization is so devised that a taint of commerciality is involved, the income of the organization can be subjected to tax. As observed by the hon’ble supreme court, it is difficult and vexed question as to at what point of time the relationship of mutually ends and that of trading begins. Since the affairs of the assessee trust are controlled by the serving officers of HUDA, hence it has to pass through greater scrutiny as the chances of it crossing the thin line between the mutuality and commerciality are very high. However, at this stage, so far the Assessment Years under consideration are concerned, the revenue could not point out the taint of commerciality in the contribution, management and application of the surplus collected through contributions and subscriptions from the members and for price of the facilities availed by its members, hence, the same cannot be said to be taxable income of the society.