Case: Ms Chelmsford Club Vs. Commissioner of Income Tax, Delhi

the levy of income-tax from the income of such business to which the above principle is applicable. In the above case, this court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English & Scottish Joint Cooperative Wholesale Society Ltd. v. Commissioner of Agriculture Income-tax, Assam, 1948 AC 405 at 419, existence of which establishes the doctrine of mutuality. They are as follows:- "(1) the identity of the contributors to the fund and the recipients from the fund, (2) the treatment of the company, though incorporated as a mere entity for the convenience of the members and policy holders, in other words, as an instrument obedient to their mandate and (3) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves." 14. If we apply the above three criteria to the facts of the case in hand then we find that the appellants business is governed by the doctrine of mutuality. 15. That apart, this Court in the Case or C.I.T. v. Bankipur Club Limited (supra) also had an occasion to deal with the claims of a number of clubs seeking benefits based on the principle of mutuality. In that case, this court held :- "Under the Income-Tax Act, 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 th facilities which it offers does not affect the mutuality of the enterprise." 16. In the same case while considering the case of the Cricket Club of India arising out of C.A. No. 10194 of 1995 and C.A. No. 3382 of 1997 (the facts of which cases are similar to the case with which we are concerned), it was held:- "Amongst others, the Cricket Club of India was in receipt of income from property owned by it - Chambers in the building of the assessee let out to members, annual value of the club house and annual value of Patiala Pavilion. The above facilities were provided only to members of the association and that too temporary accommodation. The arrangement was essentially for the benefit of the members. following the decision rendered by the Appellate Tribunal, Bombay Bench-A, for the assessment years 1974-75 and 1976-77 rendered in I.T.As Nos. 1730 and 1913(Bombay) of 1980, the Appellate Tribnunal held that no portion of the club house, Patiala Pavilion, etc. is let out to strangers and that these portions are let out only to the members and so, even if any income had actually accrued due from the members on the above counts, it will not be taxable on the principle of mutuality. In the application filed under section 256(2) of the Act, the High Court declined to refer the question of law posed by the Revenue to the effect, "whether the Appellate tribunal was justified in law in holding that the income from the property held by the assessee could not be brought to charge under the provisions of sections 22 to 26 of the Act ?" The decision was followed for the assessment year 1978-79-C.A. No. 10194 of 1995 and the High Court declined to refer any question of law for this year as well. In fact, for both the years, the decision of the Appellate Tribunal to the effect that the income received from the aforesaid counts is exempt under the principle of mutuality, was not doubted by the High Court, holding that no referable question of law arose for its decision. (emphasis supplied)." 17. From the above observations of this Court, it is clear that it is not only the surplus from the activities of the business of the Club that is excluded from the levy of income-tax even the annual value of the Club House, as contemplated in Section 22 of the Act, will be outside the purview of the levy of income-tax. to this extent also, we find that the judgment of the Allahabad High Court in the case of Wheeler Club (supra) is not a good law. 18. The High Court in the impugned judgment, apart from relying on the judgment of the Allahabad High Court in Veheeler Clubs case (supra) also relied on certain observations made by the same court in the case of C.I.T. v. Delhi Gymkhana club Ltd., 155 ITR 373 at 376 which reads thus : "Letting out of the premises is merely a provision of a facility for members. the principle of mutuality clearly applies to the surplus earned as a result of such activities. It may be that if the income can be treated as rent derived from house property, the rent or the income derived from house property will be assessable under section 22. That may be so because of the statutory fiction contained in section 22 of the Act and the scheme of the I.T. Act, that the income from house property will be assessable on notional basis." 19. In our opinion, the High Court in Delhi Gyumkhana case (supra) has not laid down any principle of law. It has merely proceeded on a hypothesis. At any rate the conclusion based on that hypothesis, in our opinion, being opposed to the principle accepted by us in this judgment will not be of any assistance to the Revence.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]8. It is to be noticed that this judgment was delivered under the provisions of theAct, 1922 and Section 9 of that Act is similar to Section 22 of the present Act. A perusal of the above judgment shows that the High court in that case proceeded on the basis that the liability to payunder Section 9 arises from the mere fact of the assessee owning the property having an annual letting value and not from his deriving any income from it. It also held that the principle of mutuality does not apply to such measure of taxation. We find it difficult to agree with the High Court on this point. In our opinion, the High court erred in coming to the conclusion that the tax levied under Section 9 of the Act (Section 22 of the new Act) is a tax on property, for more than one reason. Under the Act; be it the 1922 Act or the 1961 Act, the same does not permit the levy of tax on anything other than the `income. It is so held by the courts in India.Though the above judgment was also delivered considering the provisions of the 1922 Act, in our opinion, the legal position remains to be the same under the 1961 Act also. even if we examine this position independent of the High Courts decision referred to above, we find that the legislative competence to levyis traceable to Entry 82 of List I of Schedule VII to the Constitution which reads : "Taxes on income other than agricultural income". Therefore, any law made under this Legislative Entry can impose a tax only on income and not under any other head, there is also no dispute that the Income Tax Act of 1961 is a law made under this Entry. Hence, it is futile to contend that the levy of tax under Section 22 of the Act is a tax levied on property and not on income from property. this view of ours further finds support from a reading of Section 4 of the Act which is the charging Section. This Section unequivocally shows that the levy is on income. A conjoint reading of Sections 2(24), 14, 22 and 23 of the Act also makes it abundantly clear that what is being taxed under Section 22 is the `deemed income of an assessee from the property owned by him. At any rate, this question is no more res integral in view of the judgment of this court in Bhagwan Dass Jain (supra) where this Court had an occasion to deal with this question where the levy of tax on income from house property came to be challenged on the ground of want of legislative competence, negativing the contention raised therein and rejecting the challenge, the Court held that what is being taxed under Section 22 of the Act is, in fact, an income and not the property.The above case, in our opinion, squarely answers the arguments advanced on behalf of the Revenue. therefore, the judgment of the Allahabad High Court in the case of Wheeler Club (supra) with regard to the nature of levy under Section 22 is not a good law.11. Having come to the conclusion that Section 22 of the Act taxes only the income from property, we will now examine whether such income so far as the appellant is concerned, is not exigible to tax on the ground that such income is excluded from the purview of tax, based on the principle of mutuality. Theappellant contends that its business is governed by the principle of mutuality which, in turn, is based on a doctrine that no person can earn from himself. It is the contention of the appellant that in the business undertaken by it, every member pays for his own expenses and there is no profit motivation or sharing of profits as such amongst the members. the surplus, if any, from the business is not shared by the members but is used for providing better facilities to the members. The appellant further contends that all the factors necessary for establishing the principle of mutuality in its business is seen from the admitted facts pertaining to its business. It is argued that unlike in the case of RWITC, in the business of the appellant, no outsider is allowed to take part and the facilities provided by the appellant is exclusively for its members and their guests. therefore, there is a clear identity between the contributors and the participators to the fund and the recipients thereof respectively.A perusal of Section 2(24) shows that the Act recognises principle of mutuality and has excused all businesses involving such principle from the purview of the Act, except those mentioned in Clause (vii) of that Section. It is also an admitted fact that the business of the appellant does not come within the scope of business referred to in Section 2(24)(vii). This Court in the case of RWITC (supra) on facts came to the conclusion that the Club in that case had kept open its business not only to its members but also to outsiders who would participate in the Clubs business on payment which income from the outsiders would go to the same kitty as that of the members, consequently, the identity between the contributors and the recipients was lost. therefore, this Court held that the doctrine of mutuality did not apply in the case of RWITC (supra), otherwise this Court in that judgment had accepted that, in regard to the businesses governed by the doctrine of mutuality, the levy of tax under theAct did not arise.From the above extract of the judgment, it is crystal clear that the law recognises the principle of mutuality excluding the levy offrom the income of such business to which the above principle is applicable. In the above case, this court quoted with approval the three conditions stipulated by the Judicial Committee in the case of English & Scottish Joint Cooperative Wholesale Society Ltd. v. Commissioner of AgricultureAssam, 1948 AC 405 at 419, existence of which establishes the doctrine of mutuality.If we apply the above three criteria to the facts of the case in hand then we find that the appellants business is governed by the doctrine of mutuality.From the above observations of this Court, it is clear that it is not only the surplus from the activities of the business of the Club that is excluded from the levy ofeven the annual value of the Club House, as contemplated in Section 22 of the Act, will be outside the purview of the levy ofto this extent also, we find that the judgment of the Allahabad High Court in the case of Wheeler Club (supra) is not a good law.In our opinion, the High Court in Delhi Gyumkhana case (supra) has not laid down any principle of law. It has merely proceeded on a hypothesis. At any rate the conclusion based on that hypothesis, in our opinion, being opposed to the principle accepted by us in this judgment will not be of any assistance to the Revence.