By TIOL News Service

CHANDIGARH, NOV 29, 2017: THE issue before the Bench is - Whether a club can avail of the doctrine of mutuality w.r.t. the surplus amount received as contributions or price for some of the facilities availed by its members. And the ITAT verdict is YES.

Facts of the case

The assessee is a society, registered under the Societies Registration Act, 1860. For the AY 2006-07, the assessee filed its returns declaring nil income, on the grounds that it was a mutual concern. On assessment, the AO noticed a surplus of income over expenditure, at Rs. 35,72,081/- including interest income amounting to Rs. 21,95,943/-. Further, w.r.t. the assessee's claim of being a mutual concern, the AO examined the Memorandum of Association and the bye-laws of the society, and noticed that the control & management of the assessee was vested solely in the Haryana Urban Development Authority (HUDA), and so it was an extended arm of the HUDA. The AO further observed that the assessee made substantial investments through FDRs in bank over which the members had no control and that HUDA actually controlled all funds, including FDRs. Also the contributors to the funds were neither entitled to participate in the surplus nor otherwise had any say in the management including finances/funds of the club. The AO also noted that the Club facilities were being extend to certain non-members against payments made by them and thus Club is also involved in profit making activities from third parties. Therefore, the AO held there to be no identity between the contributors and the participants and, rejected the assessee's claim of the assessee to be a mutual concern. Thus, the AO sought to tax the entire surplus shown by the assessee, including interest income. On appeal, the CIT(A) relied on the Tribunal's order for the AY 2004-05, and allowed the assessee's claims. On Revenue's appeal to the Tribunal, it was observed that the facts of the present case were identical to those in the case during the AY 2004-05. Besides, the appeal against the Tribunal order was pending before the High Court. Therefore, the principle of mutuality was applicable to the assessee club and so its income was not taxable.

It may be noted that the issue w.r.t. applicability of the principle of mutuality was settled by the jurisdictional High Court for the AY 1997-98, wherein reliance was placed on the decision of the Apex Court in 'Banglore Club Vs. CIT'. The High Court further observed that the Tribunal had not recorded any definite finding of fact on the basis of the legal enunciations on this issue. Therefore, the High Court remanded the matter back to the Tribunal to adjudicate the same and pass a speaking order after hearing both the parties. Following the said order dated 30.11.2015 for AY 1997-98 passed in ITA No. 690 of 2005 (O&N), the High Court subsequently restored the matter to the file of the Tribunal for all subsequent years accordingly. Although some of the Revenue appeals were dismissed for having low tax effect, i.e. involving sums lower than Rs. 10 lakhs, the present appeals involve higher amounts.

On hearing the matter, the Tribunal held that,

++ considered the aims and objects of the assessee society, enshrined in the Memorandum of Association. Also considered Article 5 of the same, dealing with the 'condition' which provides that income and property of the Society shall be applied towards the promotion of the objects of the society and no part thereof shall be transferred directly or indirectly to the members of the Society. Further, no member of the Governing Body of the Society shall be paid any salary. Further, clause (d) of Article 5, as discussed above, provides that on its dissolution of the club, the property will not vest in the members of the society rather the same shall be transferred to some other institution having objects similar to the objects of the Society. Article 6 deals with management and affairs of the society which says that the same will rest in a Governing Body. Also considered the various types of membership and the constitution of its governing body.

++ it has been further provided that Permanent member has to pay an entrance fee, annual subscription, monthly subscription and such other fees as may be fixed from time to time by the Executive Committee.The Dependent Members are the spouse and dependent children of the members. Guest of the Permanent Members can also use the facility on payment of certain amount. The Corporate Member means a limited Company or an organization who will have the right to nominate not more than three persons who will be entitled to enjoy Club facilities on payment of subscription fee. Another clause of members is HUDA Members, who are members of the Authority and Gazetted officers of HUDA posted at Panchkula/Chandigarh and they are eligible to become permanent members on payment of fee of Rs. 250/- and monthly subscription of Rs. 50/- or such fee and subscription as may be determined by the Executive Committee. In the category of Service Members, all the class-I & II officers of the State Government / Central Government, Boards / Corporations etc. have been made eligible to become permanent members of the Club on payment of fee of Rs. 500/- and monthly subscription of Rs. 50/- or such fee and subscription as may be determined by the Executive Committee. The admission of any person into any category of the members of the club is subject to the decision of the executive committee.

++ in light of the same, it has to be determined as to whether or not the 'Principe of Mutuality' applied to the assessee. It is revealed that originally the higher rank officials of the HUDA have created an Association in the name of assessee Society i.e. Gymkhana Club, Panchkula. It was resolved by them that certain high rank officials of the HUDA will be only will look after the management of the Society. The membership was also open to the persons from public subject to the approval by the Executive Committee. It is also an admitted fact that only the members of the Club are entitled to enjoy the facilities of the Club. It is also an admitted fact that surplus is to be expended for the common benefit of the Club members or for carrying out the objectives of the Club. All the members of the Club enjoy the equal right so far as the utilization of the facilities of the Club or the common benefits of the members are concerned. As held by the Supreme Court in the case of 'Banglore Club vs CIT' , the 'principal of mutuality' relates to the notion that a person cannot make a profit from himself. An amount received from oneself is not regarded as income and is therefore, not subject to tax. The concept of Mutuality has been has been explained to define group of people who contribute to a common fund, controlled by the group, for a common benefit. Any amount surplus to that needed to pursue the common purposes is said to be simply an increase of common fund and as such neither considered income nor taxable. In the light of the above principles, we have to decide as to whether the surplus accrued or collected during the year is taxable income of the assessee or the same is just the collection of the common fund to which Principle of mutuality applies.

++ the nature, formation and functioning of the assessee Club before us also resembles to the characteristic and parameters of a mutual organization as discussed above. The only distinguishing feature in respect of the assessee Club is that the management and control of the Club vests in certain pre-authorized/pre determined persons according to their rank and status in the government organization HUDA (Haryana Urban Development Authority), which means that members of the Club do not enjoy equal rights so far as the management and decision making in Society is concerned. They also do not have voting rights to elect their representatives for running the management and affairs of the Club on their behalf, rather, the members in the Management Committee come by default because of their official position in HUDA. This being the position, now we examine as to whether the assessee club conforms to the parameters required of a mutual organization.

++ one of the point of views can be that the decision to appoint ex officio members was taken by the first members of the club at the time of its creation which also finds mention in the Memorandum of Association. The other members entering into the club have agreed to the aforesaid aims and objects, hence, it can be said to be a mutual decision of the members of the club to adopt such a procedure of appointing ex-officio members in the management committee. That the members may mutually agree to appoint any person or persons or to give responsibility to any of its members to run the day to day affairs of the club. Hence management of the club has nothing to do with the mutual status of the club. However this view has a rebuttal that if the members have a right to mutually take a decision to appoint any person/persons in the management, then the must got right to mutually take a decision to remove or discharge that person/persons from the management of the club. Right to appoint includes right to remove or discharge also. Now if we admit the plea that it is the mutual decision of the club members to give the responsibility of the management of the club to the high rank officers of HUDA, whether any right of reverse action that is to divest the officials of HUDA from the management of the club lies with the members of the club? The answer is no. We have gone through the memorandum of the association but have not found any clause giving any such right in particular or any other right in general to the members of the club in general. All the rights vests in the executive commit tee. The Board of Patron have the absolute powers in terms of taking decision pertaining to any matter relating to Club.They have veto power on the decision taken to any committee / body relating to the club. Under these circumstances, it can not be said that the appoint of management or vesting of all rights relating to the running of affairs of the club including taking financial decisions relating to the manner and items on which the surplus is to be applied. In general parlance, as we understand, the participation in the surplus includes not only the right to get common benefit out of surplus but also the right to participate in the decision making as to in what manner or on what item or services the surplus is to be applied. Having said so, we do not mean that the consent of each or every member is required to be taken, but it must come from the members as a class or by or through their representatives either elected or selected mutually by the members. In the case of the assessee club, the representatives who takes the decisions relating to the club are neither elected nor selected by the members of the club but they come by default as per the clause of the Memorandum of association. Even there is nothing provided in the Memorandum of association that members/ general body of the members have got any right to bring any change in any clause of the MOA. As discussed above, The Supreme Court in para 7 of the order in the case of 'Banglore Club' has observed that the concept of Mutuality has been explained to define group of people who contribute to a common fund, controlled by the group, for a common benefit. In the case of assessee club, though the contribution to common fund for a common benefit is present, however, we have our doubts, in view of the discussion made above, that it can in the real sense be said that the club is controlled by the group.

++ no doubt, clause (iv) of the Memorandum of Association provides to invite non-members who are eminent persons of the society such as renowned artists, masters, sportsmen, cultural leaders, scholars, scientists and creative artists, to take advantage of the facilities offered by the Society. In our view that itself does not give any impression that inviting such members to enjoy the facilities of the Club has any profit motive. The facilities of the Club are not offered to non-members as a matter of practice but it is restricted only to the eminent persons of the society who are invited by the Club to avail the facilities of the Club. It is not the case of the Revenue that funds of the Club have been raised or collected with a profit element to the HUDA or to the official management who are ex-officio members of the Club. No doubt the participation in the surplus of the non-official members is restricted to the enjoyment and use of facilities of the Club and they are not entitled to participate in the decision making as to on which activity and in what manner funds are to be expended for the common benefit of the members or for carrying out the objects of the Club. Such a restriction though may be of some importance with the question as to the mutually equal rights in the management of Club if any such dispute arises inter se between the members. However, so far as the taxability of the surplus is concerned, the surplus funds cannot be said to be income of the Society as there is lack of business profit motive involved and the funds so collected have to be necessary expended for the common benefit of the contributors only. It has also been held time and again that when we speak of the contributions to the common fund and the participation in the surplus, that does not mean that each member should contribute to the fund or that each member should participate in the surplus but they have to be seen as a class of the persons who were contributing and are entitled to participate in the surplus. It is not the matter that the class may be diminished by persons coming out of the scheme or increased by others coming in. The taxation under the Income Tax Act is to be done on the receipts or the income of the society. As discussed above, though the assessee club may fall short of the definition of mutual organization in common parlance or understanding of the term, however, so far as the taxation of the surplus out of the contributions is concerned, the same cannot be said to be the income of the club, being a common fund collected for common benefit of the contributors only.

++ considered decisions in the cases of 'Styles (Surveyor of Taxes) Vs. New York Life Insurance Co', 'Thomas Vs. Richard Evans & Co Ltd' and 'Commissioner of Income Tax, Madras Vs. Kumbakonam Mutual Benefit Fund Ltd.' and 'CIT, Bihar Vs. Bankipur Club Ltd'. In view of the above, there can not be said to be straight jacket formula to say that in every a mutual concern the members must be entitled to a share in the surplus. In the aforesaid case laws as discussed by the Supreme Court in Banglore Club's case, if the scheme or the mechanism of functioning of a mutual organization is so devised that a taint of commerciality is involved, the income of the organization can be subjected to tax. As observed by the supreme court, it is difficult and vexed question as to at what point of time the relationship of mutually ends and that of trading begins. Since the affairs of the assessee trust are controlled by the serving officers of HUDA, hence it has to pass through greater scrutiny as the chances of it crossing the thin line between the mutuality and commerciality are very high. However, at this stage, so far the AYs under consideration are concerned, the Revenue could not point out the taint of commerciality in the contribution, management and application of the surplus collected through contributions and subscriptions from the members and for price of the facilities availed by its members, hence, the same cannot be said to be taxable income of the society. Therefore, for the AYs under consideration, the assessee is entitled to the benefit of the doctrine of mutuality in respect of the surplus amount received as contributions or price for some of the facilities availed by its members. However the amount of interest earned by the assessee from the fixed deposits in the banks will not fall within the ambit of the mutuality principle and will therefore, be exigible to Income-Tax in the hands of the assessee-club.

(See 2017-TIOL-1652-ITAT-CHD)