Case: Commissioner Of Income-Taxbombay City Vs. Royal Western India Turf Club Ltd

The Royal Eastern India Turf Club Ltd. (hereinafter referred to as the "Company") was incorporated in 1925 under the Indian Companies Act, 1913. The objects for which the company was incorporated were, inter alia, asTo take over the assets, effects and liabilities of the ten unincorporated club known as the Western India Turf Club;(b) to carry on the business of a Race Course Company in all its branches......;(c) to establish any clubs, Hotels and other conveniences in connection with the property of the company;(d) to carry on the business of Hotel Keepers, Tavern Keepers, licensed victualiers and refreshment purveyors;(e) to sell, improve, manage, develop, lease, mortgage, dispose of or otherwise deal with all or any part of the property of the company, whether movable or immovable, with power especially to sell and distribute or to permit to be sold and distributed wines, spirits, tobacco and otherliability of the members is limited by guarantee, each member undertaking to contribute to the assets of the company, in the event of its being wound up, such sum as may be required, not exceeding one rupee, for payment of the debts and liabilities costs, charges and expenses of the winding up. Clause 6 of the Memorandum provides that if upon the winding up or dissolution of the company there remains after the satisfaction of all debts and liabilities any property whatoseover, the same would be paid to or distributed among the members of the club in equal shares.3. Under the Companys Article of Association that were in force during the accounting year, besides honorary Stand Members, Visiting Members and Temporary Members there were two main categories of members, namely, the Club Members and stand Members. The number of Club members was limited to 350, exclusive of four designated high dignitaries and the number of stand members was liable to be limited by the committee at any time. Club members and stand members had to be elected by ballot by theelection every Club member had to pay an entrance fee of Rs. 150/- and a stand member had to pay an entrance fee of Rs. 75/-. Members of either class had also to pay an annual subscription of Rs.25/-. The entire management of the compny and the control over its funds and property were left in the hands of a committee of nine Club members elected as provided in the articles of Association of the company.4. The company was and is the lessee of two plots of land, one in Bombay and the other in Poona. Two race courses have been laid out on these plots of land. On each race course there are three enclosures known as Members Enclosure. First Enclosure; and Second Enclosure. Each enclosure has a stand or stands from which races are watched. The Members Enclosure is for the exclusive use of the members, their wives and unmarried daughters above the age of 12 years and their guests. The First and Second Enclosures are open to the public. For admission into each of the three enclosures an admission fee isthe Members Enclosure admission is by season tickets or daily admission gate tickets. Private Boxes in the Members Enclosure are available to members on payment according to the number of chairs in the box. In addition to the admission fees to the Members Enclusure, a member has to pay, in respect of his guests, an additional fee. In each of the enclosure there is totalisator run on the pari-mutual system at which persons in that enclosure place their bets on each race. These several totalisators are linked by electric appliances, so that the moneys received from members and non-members are included in one pool and distributed amongst the holders of the winning tickets in equal proportions. In each enclosure there is arrangement for the supply of refreshment on payment.5. The present disputes arose in connection with the assessment of the companys income, profits, or gains in the accounting year 1st July 1938 to 30th June 1939. The company received large sums of money on admission tickets from members as well as from non-members, besides other money on other accounts. The company claimed that in computing its total income, the following four items of receipts should be excluded; the following four items of receipts should be excludedSeason admission tickets from members. Rs. 23,635/-(2) Daily admission gate tickets from members. Rs. 51,777/-(3) Use of private boxes by members. Rs. 21,490/-(4) Income from entries and forfeits received from the members whose horses did not run in the races during the season. Rs.was no dispute as to the liability of the company in respect of moneys received from non-members and moneys received on all other accounts. The Income Tax Officer held that all the four items mentioned above were receipts from business failing under section 10(1) of the Income Tax Act or, in the alternative, were receipts by an association performing specific services for its members for remuneration definitely related to those services within the meaning of section 10(6) of the Act and assessedappeal by the company the Appellant Assistant Commissioner dismissed the appeal. He held that the company was carrying on business and that all the above-mentioned four items were receipts from business within the meaning of section 10(1), although none of those items fell within Section 10(6). On a further appeal by the company to the Income Tax Appellate Tribunal the latter came to the conclusion that none of the sums in question could be said to be profits or gains of a business coming under section 10(1). The Tribunal also held that items 1, 2 and 3 did not also come within the ambit of section 10(6) of the Act. Apparently the Tribunal did not consider the applicability of section 10(6) with regards to the fourth item.6. On the application of Commissioner of Income Tax, Bombay, the Appellate Tribunal, under section 66(1) of the Act referred the following two questions for the opinion of the Bombay High Court namely -(1) whether on the acts found or admitted in the case. The Royal Western India, Turf Club Ltd., Bombay, received the sums of Rs. 23,635, Rs. 51,777, Rs. 21,490 and Rs. 82,490 from a business carried on by it with the members within the meaning of section 19(1) of the Indian Income Tax Act?(2) whether on the facts found or admitted in the case. The Royal Western India Turf Club Ltd., Bombay, received the sum of Rs. 23,635. Rs. 51,777 and Rs. 21,490 (and Rs. 82, 490 with regards to which sum the Tribunal did not consider the applicability of section 10(6) as a trade, professional or similar association performing services, for its members for remuneration definitely related to those services within the meaning of section 10(6) of the Indian Income Tax Act?7. The reference having come up for hearing the High Court found that the statement of the case was insufficient and incomplete and accordingly it sent back the reference of the Appellate Tribunal with directions to submit a proper statement of facts. The appellate Tribunal thereupon submitted a supplementary statement of the case setting forth in greater detail the facts necessary for the disposal of the reference.On further herring of the reference in the light of this supplementary statement of the case the High Court held that the company performed two distinct functions, namely, the carrying on of the business of racing and the carrying on of the club and that the first three items of Rs. 23,635 Rs. 51,777 and Rs. 21,490 were charged to the members in respect of the various amenitities specified in the supplementary statement of the case which were given by the club only to its members, namely, the use of the Members Enclosure on payment of admission fee, the use of the members totalisator the right to watch the races from the lawn or from an unreserved seat in the Members stand, the use of a private box subject to payment and the use of the Guest House at Poona.Accordingly the High Court held that the said first three items did not fall either under section 10(1) or section 10(6) of the Act. With regard to the sum of Rs. 82,490 the High Court that it did not come under section 10(6) but was a part of the income of the business of horse racing done by the company. Accordingly the High Court answered question No. 1 in the negative as regards the first three items of Rs. 23,635 Rs. 51,777 and Rs. 21,490 and in the affirmative as regards the fourth item of Rs. 82,490 and it answered question No. 2 in the negative in respect of the first three items and in the affirmative with regard to the fourth item. In effect the High Court held that the first three items were not taxable either under section 10(1) or section 10(6) and that the fourth item was taxable under both the said subsection of that section.The Bombay High Court having dismissed the application of the Commissioner of Income-Tax under section 66-A (2) to appeal to this Court, the Commissioner applied for and obtained special leave to appeal to this Court. The company has not appealed from that part of the order which declared that the fourth item of Rs. 82,490/- was taxable.

Reasoning:
14. It is clear to us, taking the facts admitted or found in the case before us, that the principles of --- Styles case (A), as explained by subsequent decisions noted above, can have no application to this case. Here there is no mutual dealing between the members inter se in the nature of mutual insurance, no contribution to a common fund put up for payment of liabilities undertaken by each contributor to the other contributors and no refund of surplus to the contributors. There being no mutual dealing, the question as to the complete identity of the contributors and the participators need not be raised or considered. Suffice it to say that in the absence, as there is in the present case, of any dealing between the members inter se in the nature of mutual insurance the principles laid down in --- Styles case (A) and the case that followed it can have no applicationprinciple that no one can make a profit out of himself is true enough but may in its application easily lead to confusion. There is nothing per se to prevent a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its shareholders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as share holders and does not come back to them as persons who had contributed them.Where a company collects money from its members and applies it for their benefits not as shareholders but as persons who put up the fund the company makes no profit. In such cases where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members. What kinds of business other than mutual insurance may claim exemption from tax liability under section 10(1) of the Act under the principles of --- Styles case (A), need not be here considered; it is clear to us that those principles cannot apply to an incorporated company which carries on the business of horse racing and realise money both from the members and from non-members for the same consideration, namely, by the giving of the same or similar facilities to all like in course of one and the same business carried on by it.As already stated, in the instant case there is no mutual dealing between the members inter se and no putting up of a common fund for discharging the common obligations to each other undertaken by the contributors for their mutual benefit. On the contrary we have here an incorporated company authorised to carry on an ordinary business of a race course company and that of licensed victuallers and refreshment purveyors and in fact carrying on such a business. There is no dispute that the dealings of the company with non-members take place in the ordinary course of business carried on with a view to earning profits as in any other commercial concern.It is further admitted that some of the dealings of the company with its members take place in the ordinary course of business and the profits arising out of those dealings e. g. the fourth item of receipt of Rs. 82,490 are taxable. The company gives to its members the same or similar amenities as it gives to non-members, namely, the use of an unreserved seat in a stand, the facility to watch the races and to bet on the horses in the races, use of the totalisator in that stand and the facility for refreshment. In fact the daily ticket fee for admission into the Members Enclosure is exactly the same as that for admission into the First Enclosure to which the public have access. The only differences is that a separate enclosure with a separate totalisator is provided for the members where they can meet their fellow members and not be disturbed by the intrusion of non-members.This privilege is referable to their membership of the company for which they pay an entrance fee on their election as members and for which they pay the periodical subscription both of which are not sought to be brought to charge. The rest of the facilities mentioned above which the members get are in substance the same as those enjoyed by the public. Those facilities are given to members and non-members alike for a price. The character of the charges made on members is precisely the same as or is similar to that of the charges made on non-members, for the company receives moneys from both members and non-members in return for the same or similar facilities given to both in the course of one and the same business.The dealing in both cases disclose the same-profit earning motive and are alike tainted with commerciality. In the circumstances, all the four items of receipts from members must be taken into account in computing the total income of the company. The fact that the company has so long enjoyed exemption from taxation is neither here nor there, for there can be question of acquiring any prescriptive right to exemption fromour view the company before us is not a "trade association" in this sense although it carries on a business. In this view of the matter it is unnecessary to discuss the further question whether the facilities or amenities given by the company to its members may be regarded as "Services" within the meaning of section 10(6). We are of opinion that section 10(6) has no application, for the company is not a trade or professional or similar association within the meanings of that