JUNAGADH GYMKHANA vs. INCOME TAX OFFICER

Since, all these appeals involve common question of law, they are heard together and disposed of by this common judgment.

By way of these appeals, the appellant- assessee has challenged the common order passed by the ITAT, Rajkot, Dated : 27.06.2005, in ITA Nos. 125, 126, 127, 128, 129 & 130/Rjt/2005. 3. This Court, at the time of admitting these appeals, framed the following common substantial question of law; “Whether on the facts and in the circumstances of the case the Tribunal was justified in law in upholding the action of the Assessing Officer of taxing 'card guest income' and 'general guest fee' which are charges paid by the members of the assessee?”

Mr. R.K. Patel, learned Advocate for the appellant-assessee, has submitted that the Tribunal materially erred in passing the impugned order inasmuch as it failed to appreciate the ‘Principle of Mutuality’ in its proper perspective. Mr. Patel, further, submitted that the Tribunal also wrongly misinterpreted the term ‘Guest’ in the context of Clause (2) of the Constitution of the appellant-assessee club, which provided that the member shall have to pay guest charge, as may be decided by the Managing O/TAXAP/606/2005 JUDGMENT Committee of the Club from time to time. Mr. Patel submitted that the Tribunal ought to have appreciated the fact that the ‘guest charge’ paid by its members is utilized by the club for benefit and development of the club members and not for the purpose of profit making. Mr. Patel, then, submitted that the Tribunal ought to have appreciated the fact that in the instant case, the contributors and participants being the members of the club, the test of ‘mutuality’ is fully justified. Mr. Patel, lastly, submitted that in view of the decision of the Apex Court in “CHELMSFORD CLUB VS. COMMISSIONER OF INCOME TAX”, [2000] 243 ITR 89, the Tribunal ought to have held that the principle of ‘mutuality’ would apply to the case on hand.

As against this Shri. Pranav G. Desai, learned Advocate for the respondent-Revenue, has strongly urged that these appeals sans merit and the authorities below have concurrently held against the present appellant-assessee. Mr. Desai submitted that as far as members are concerned, it is not the case of the respondent-Revenue that their income is liable to tax, but, it is the income derived from the guest, which would be taxable.

Going through the judgment of the ITAT and the facts of the case, which goes to the root O/TAXAP/606/2005 JUDGMENT of the matter, the ITAT in Para-9 has observed as under; “9. Going carefully through the above decision and also other decisions relied on by the assessee as well as the authorities below, we are of the view that the principles of mutuality applies so far the amount received from the members. But, any amount received from non-members by a mutual concern can be brought to the tax-net of income-tax and there is no escape from it on the guise of mutuality. In the case of CIT Vs. Royal Western Indian Turf Club Ltd., [24 ITR 55(SC)]. Hon’ble Court has held that the principle of mutuality does not prevent a mutual association from doing business with the some of its members because, in that case, the association must be deemed to be doing business not with itself but with others who are different entities and there, the income earned shall bear tax. This principle has been followed by the Apex Court as well as different High Courts in a number of cases. Further, the application of the principle of mutuality is not destroyed by the presence of transactions with, or profits derived from, non-members. The said

Here, it would not be out of place to mention that there is not a finding of fact that the club receives any amount from non-members, all that the Tribunal has held is that the officer has brought the income from the costs, which is to be paid by the members on behalf of the guests. This itself goes contrary to the facts and the decision of the Apex Court in “BANGALORE CLUB VS. COMMISSIONER OF INCOME TAX & ANR.”, 350 ITR 509(SC), on which reliance has been placed by Mr. Desai. In the said case, the Apex Court observed that the first condition to invoke the principle of mutuality requires that there must be a complete identity between the contributors and the participators. However, in the very judgment, the Apex Court spelt out that caution to be exercised while looking to the mutuality or the commercial activity and it is a difficult question of fact. In this case, facts, which is to be seen from factual matrix, shows that neither the ITAT nor CIT come to the conclusion as to who contributed to the funds as non-members. Just because the non- members are brought to the club, it would not come out of the mutuality aspect. The decision of this Court in “SPORTS CLUB OF GUJARAT LTD. Vs. CIT”, O/TAXAP/606/2005 JUDGMENT 171 ITR 504, 512 (Guj.), which is sought to be relied upon by the authorities below and Mr. Desai, this Court held that the assessee’s income from interest was not from a mutual activity and as such it was exigible to tax, and therefore, the assessee was not entitled to the benefit under Section 44A and that the entire expenditure incurred in all activities was not deductible from the assessee’s taxable income. In the said case, this Court further held that the contributors to the common fund are entitled to participate in the surplus, thereby creating an identity between the participants and the contributors. Just because the transactions, which are non-mutual in character, would not destroy the principle of mutuality. Thus, the decision in the case of “BANGALORE CLUB”(Supra) would not apply to the facts of the case on hand, since, in that case the assessee-Club had received income from interest on surplus funds kept in member banks. Hence, these appeals deserve to be allowed.

In the result, all the appeals are ALLOWED and the question posed before us is answered in affirmative and in favour of the appellant-assessee and against the respondent- revenue. No order as to costs. (K.S.JHAVERI, J.) O/TAXAP/606/2005 JUDGMENT (K.J.THAKER, J) UMESH