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

The following two questions were referred to the High Court of Delhi by the Income Tax Appellate Tribunal (for short the tribunal) in respect of assessment year. Whether on the facts and in the circumstances of the case, the Honble Tribunal was legally correct in holding that the annual letting value of the club building is not assessable tounder the head `Income from property?2. Whether on the facts and in the circumstances of the case, the Honble Tribunal was legally correct in holding that the principle of mutuality applies to the property income and accordingly it is not taxable income of the assesseeThe High Court relying on Section 22 of the Income Tax Act, 1961 (hereinafter referred to as the Act) and following the judgment of Allahabad High Court in the case of C.I.T., U.P. v. Wheeler Club Limited, (1963)49 ITR 52 and some observations of the Delhi High Court in the case of C.I.T.,v. Delhi Gymkhana club Ltd., 155 ITR 373 answered the question in the negative and in favour of the Department. Against the said judgment of the High Court dated 11.11.1992, the appellant has preferred these appeals.Before we proceed to examine the revival contentions addressed before us, we should notice the undisputed facts necessary for disposal of these appeals which are asappellant provides recreational and refreshment facilities exclusively to its members and refreshment facilities exclusively to its members and their guests. Its facilities are not available toThe Club is run on `no profit on loss basis in that the members pay for all their expenses and are not entitled to any share in the profits. Surplus, if any, is used for maintenance and development of the Club. The Club house which is theof these appeals is owned by the appellant and is used for providing facilities to its members.

Court's reasoning:
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.