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PETITIONER: M/S.  CHELMSFORD CLUB

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, DELHI

DATE OF JUDGMENT:       02/03/2000

BENCH: D.P.Wadhwa, N.S.Hegde

JUDGMENT:

     SANTOSH HEGDE, J.

     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 years 1977-78 and 1978- 79 :

     1.   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 to income-tax under 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 assessee ?

     The 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., Delhi-II 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.

     On  behalf of the appellant, it is contended before us that  the appellant though registered as a Company under the Companies  Act, its business is governed by the principle of mutuality,  therefore,  the  income, if any, earned  by  the appellant  is outside the scope of the Income-tax Act.  This is  based  on a principle that it is the only  income  which comes  within  the definition of Section 2(24) of  the  Act, that  could be taxed and this definition generally  excludes the  income  from business involving doctrine of  mutuality, except  the  business  that  is  included  specifically   in sub-clause  (vii)  of that Section.  The appellant  contends that  its  business  admittedly  does not  come  under  that clause,  hence,  any income earned by the appellant  is  not

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exigible  to income-tax.  The appellant relies on a decision of this Court in C.I.T.  vs.  Bankipur Club Limited (226 ITR 97).   It is further contended by the appellant that what is taxed  under Section 22 of the Act is in reality an  income, though  in a deemed form and, therefore, this income is also outside  the scope of income-tax in view of the principle of mutuality.   For  this proposition, the appellant relies  on another  judgment of this Court in the case of Bhagwan  Dass Jain  vs.   Union  of India & Ors.  (128 ITR 315).   On  the contrary  on behalf of the Revenue, it is contended that the business  of  the appellant is not governed by principle  of mutuality because the said business does not show that there is   any   identity  between   the  contributors   and   the participators  as is required for establishing the  doctrine of  mutuality.  For this proposition, the respondent  relies on  a  judgment of this Court in the case of C.I.T.,  Bombay City  vs.   The Royal Western India Turf Club Ltd.   (RWITC) (21  ITR 31).  The respondent also contends that the levy of tax under Section 22 of the Act is a tax on property and not on  income,  therefore, the principle of mutuality does  not apply  to  such  levy.  For this  argument,  the  respondent relies  upon  a judgment of the Allahabad High Court in  the case of C.I.T.  vs.  Wheeler Club Ltd.  (supra).

     Before  we  proceed to examine the  rival  contentions addressed  before us, we should notice the undisputed  facts necessary for disposal of these appeals which are as follows :-

     The  appellant  provides recreational and  refreshment facilities exclusively to its members and their guests.  Its facilities  are  not available to non-members.  The Club  is run on no profit no 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  the subject-matter  of  these appeals is owned by the  appellant and is used for providing facilities to its members.  In the above  factual  matrix  we will now  examine  the  questions involved in these appeals.

     We  will  first decide the question :   whether  under Section 22 of the Act, tax levied is on income from property concerned  or  on  the property itself  ?   Obviously,  this argument  of  the Revenue that the tax under Section  22  is being  levied not on the income from the property but on the property  is  on the basis of the judgment of the  Allahabad High Court in Wheeler Clubs case (supra) wherein a Division Bench of that court held with reference to the business of a Club as follows:-

       liability  to pay income tax arises from the  mere fact  of  his owning the property having an  annual  letting value and not from his actually deriving any income from it. Even  if  he  does not derive any income from  it,  as,  for example,  when  he  occupies it himself or  lets  it  remain vacant, he is liable to pay tax.

     Section  9  does  not exempt any income from  a  house except  income  from  a  house occupied for  carrying  on  a business or profession.  The assessee is not carrying on any business  or  profession  in the quarters;   therefore,  the income  from  them is not exempted by anything contained  in section  9.  There is no provision and there is no law which exempts  from  assessment income from house property on  the

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sole  ground  that  the contributor of the  income  and  the recipient  are one and the same person.  On the other  hand, the  fact  that  under  the law an owner is  liable  to  pay income-tax  on  the annual letting value even if he  himself occupies  the  house, shows that the principle of  mutuality does  not apply in a case governed by section 9.  Naturally, when  the basis for assessing tax on income from property is the  mere  ownership  of  the property and  not  the  actual realisation  of  income, the question whether the payer  and the  recipient are one and the same person cannot arise.  It is  only when what is assessed is income from business  that the  principle  of mutuality may be applicable;   where  the basis  for assessment is the earning of income, the question may  arise whether the recipient of the income and the payer are not one and the same person.

     It  is to be noticed that this judgment was  delivered under the provisions of the Income-tax Act, 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  pay income-tax  under 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.  As far back as in  the  year 1946,  the Bombay High Court in D.M.  Vakil v.  C.I.T.   (14 ITR 298) held :

     It  is true that under the Indian Income-tax Act  the only  thing  that can be taxed is income and  nothing  else. The  charging  section is Section 3;  it charges  the  total income  of  an assessee;  and total income is  defined  in Section  2(15)  as the total amount of income,  profits  and gains  computed in the manner laid down in this Act. 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 levy income-tax is 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  integra in view of the judgment of this Court  in

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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.  This  Court  after elaborately  considering  the decisions of  various  courts, came  to  the following conclusion :  Even in its  ordinary economic  sense, the expression income includes not merely what is received or what comes in by exploiting the use of a property  but also what one saves by using it oneself.  That which  can  be  converted  into  income  can  be  reasonably regarded as giving rise to income.  The tax levied under the Act  is on the income (though computed in an artificial way) from  house  property  in the above sense and not  on  house property.   Entry  49 of List II of the Seventh Schedule  to the  Constitution is not, therefore, attracted.  The levy in question  squarely  falls  under entry 82 of List I  of  the Seventh Schedule to the Constitution.

     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.

     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.   The  appellant  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.   Per contra,  based on the decision of this Court in the case  of RWITC (supra), the Revenue contends that for the doctrine of mutuality to be applicable, there should be a clear identity between  the contributors and the participators to the  fund and the recipients thereof respectively, which, according to the  Revenue,  is lacking in the case of the  appellant.   A perusal  of  Section  2(24) shows that  the  Act  recognises principle  of  mutuality  and has  excluded  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

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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  the Income-tax Act did not arise.   This  is clear  from the observations of this Court in that  judgment which  are as follows:- It is clear to us, taking the facts admitted or found in the case before us, that the principles of  Styles case, 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 and the cases that followed it can have no application here. The  principle 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  shareholders  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 benefit  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 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  realises 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  alike  in course of one and the same business carried on by it."

     From  the above extract of the judgment, it is crystal clear  that  the law recognises the principle  of  mutuality excluding  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

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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.

     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.  That apart, this Court  in  the  case of C.I.T.  vs.  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 the facilities which it offers does not affect the mutuality of the enterprise.

     In  the  same case while considering the case  of  the Cricket  Club of India arising out of C.A.  No.10194/95  and C.A.   No.3382/97  (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 Tribunal  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.

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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).

     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.

     The  High  Court in the impugned judgment, apart  from relying  on  the  judgment of the Allahabad  High  Court  in Wheeler   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.

     In  our opinion, the High Court in Delhi Gymkhana 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 Revenue.

     For  the reasons stated above, we are of the view that the  business of the appellant is governed by the  principle of  mutuality  even the deemed income from its  property  is governed  by  the said principle of  mutuality.   Therefore, these  appeals have to succeed.  Accordingly the appeals are allowed  and the judgment impugned herein is set aside.  The questions  referred  by  the tribunal are  answered  in  the affirmative  and  in favour of the appellant.  On the  facts and  circumstances  of  these cases, the parties  will  bear their own costs.