ORDER
R.V. Easwar, Judicial Member
1. The appeal is delayed by one day. After perusing the petitions dated 27-2-1989, for the condonation of the delay and after hearing the Id. departmental representative, we are satisfied that the delay was due to reasonable cause. We condone the same and admit the appeal.
2. The assessee in the present case is the Bengal Rowing Club. We are concerned with the assessment year 1985-86 for which the relevant previous year ended on 31-12-1984. The Club filed a return of income on 17-6-1985, showing “nil” income. The assessment was originally completed under Section 143(1), but later reopened under Section 143(2)(b) of the Act. In the course of the assessment proceedings pursuant to the notice under Section 143(2)(b), the assessee produced its books of account and other relevant details as required by the Income-tax Officer. The Income-tax Officer took note of the facts that the total receipts by way of subscription amounted to Rs. 5,23,810, interest on Fixed Deposit amounted to Rs. 40,767 and Sundry receipts and income came to Rs. 93,968. The net surplus on the amenities provided to the members including catering came to Rs. 5,58,287. As per the income and expenditure account, the excess of income over expenditure which was carried to the members’ capital account in the balance sheet was Rs. 2,76,866. The Income-tax Officer required the assessee to furnish a break-up of the sales of Rs. 31,09,786 in the catering division. The break-up furnished by the assessee included Rs. 19,36,540 as representing sales of coupons. While processing the sales account in the Catering Division of the Club, the Income-tax Officer found that in respect of the sales other than coupons sales, it was possible to identify the members to whom the services or the sales were made, but that it was not possible to identify the persons to whom sales or services were rendered by the Club against sale of coupons. From this fact, the Income-tax Officer inferred that the assessee was not able to establish the complete identity of the contributors so far as the coupons sales are concerned. He also took the view that since no details regarding the identity of the purchasers of the coupons were available, the assessee was acting as a shield for the undisclosed income of its members. The Income tax Officer further held that the principle of mutuality was destroyed in the assessee’s case by the presence of the transactions with persons whose identity could not be established. In this connection, he adverted to the decision of the Supreme Court in the case of CIT v. Royal Western India Turf Club Ltd. [1953] 24 ITR 551. In this view of the matter, the Income-tax Officer held that the net surplus of Rs. 2,76,866 shown in the income and expenditure account should be brought to tax, Accordingly, he completed the assessment on 29-2-1988.
3. The assessee carried the matter in appeal before the CIT(A). The CIT(A) heard the appeals for the assessment years 1982-83 and 1985-86 together. He passed a consolidated order on 13-10-1988. It was pointed out on behalf of the assessee that the issue regarding the taxability of the Club has already been decided in favour of the assessee by the Tribunal for the earlier years. After taking note of this fact, the CIT(A) held as under:
The submission of the appellant is correct. The issue regarding the taxability or otherwise of the club has already been settled by the ITAT for the assessment years 1968-69 to 1970-71 and by the CIT (A) for the assessment year 1983-84, following which, the assessment year 1984-85 had also been decided in favour of the appellant. The facts and circumstances of the case remains the same, and there is no doubt that the activities of the club are confined strictly to its members only. Even if visitors are brought in as guest by the members, the only instance were outsiders can enter, the members has to enter his name and pay for the expenditure himself. I have also perused the various registers maintained by the club and I am fully satisfied that no outsider is admitted to the premises of the club, let alone take part in the activities of the club except as the guest as stated above. Therefore, following the orders of the appellate authorities cited above, the ITO is directed to accept the income for these two years also as Nil, and no income is taxable and no loss is carried forward in respect of the club.
4. It is against the aforesaid order that the revenue has preferred the present appeal before us. It may straightway be stated that no appeal has been preferred for the assessment year 1982-83. In the present appeal, the following grounds have been taken:-
1. That, the learned Commissioner of Income-tax (Appeals) erred in holding that the assessee did not carry on any trade and commercial activities.
2. That, the learned Commissioner of Income-tax (Appeals) is not correct in holding that income from rendering services to members is exempt.
3. That, the learned Commissioner of Income-tax (Appeals) has not considered the provisions of Section 28(iii) of the Income-tax Act.
4. That, the income by way of interest from fixed deposit is taxable in view of the Allahabad High Court decision in CIT v. Wheeler Club [1981] 127 ITR 264 (sic).
5. That, the services like supply of food and drinks to members should be treated as commercial activity.
6. That, the learned Commissioner of Income-tax (Appeals) is not correct in holding the taxable income to be the ‘Nil’.
5. The Id. departmental representative contended that the assessee’s claim that its income was exempt from income-tax on the principle of mutuality cannot hold good on the facts of the case, since according to him the presence of non-members as guests of the members was fatal to the claim. According to him, since the club has allowed the non-members, to utilise the services of the Club, the principle of the mutuality was destroyed and it. cannot be stated that there was complete identity between contributors and the participants of the common fund. According to the Id. departmental representative, this total identity was a basic requirement for successfully claiming the exemption on the principle of mutuality. He also submitted that the assessee has not been able to establish the identity of the purchasers of the coupons. Since the details of the persons who purchased the coupons and utilised the services of the Club were not made available by the assessee nor were such details available in the books of account, the entire income of the assessee was taxable and the principle of mutuality had no place in the assessee’s case.
6. On the other hand, the Id. counsel for the assessee first submitted that in respect of the assessment year 1984-85, the Tribunal by order dated 5-3-1992 in ITA No. 358/Cal./89 has upheld the assessee’s contentions based on the principle of mutuality. It was further pointed out that in respect of the assessment years 1986-87 to 1990-91 the Income-tax Officer has accepted the returns filed by the assessee declaring ‘nil’ income. It was further pointed out that so far as the assessment year 1982-83 is concerned, though the CIT(A) has allowed the assessee’s appeal, the Department has not preferred any appeal to the Tribunal, and such conduct must be taken as an acceptance of the conclusion of the CIT(A) on the part of the Department. It was also argued on the basis of the Rules and Regulations of the Club that no person who is not a member can purchase any coupons from the Club, and therefore it is not correct to say as was stated by the Income-tax Officer that the identity of the purchasers of the coupons is not proved. Our attention was drawn to the decision of the Tribunal in the case of B.V. Aswathiah & Bros. v. CIT [1992] 198 ITR 108 (Kar.) and in the case of Gulabrai Hanumanbox v. CWT [1992] 198 ITR 131 (Gauhati) in support of the contention that the earlier order of the Tribunal should be followed for the year under appeal.
7. In the course of the arguments, the Bench after going through the earlier order of the Tribunal relied on by the Id. counsel for the assessee, entertained certain doubts on the question of the applicability of the principle of matuality to the facts of the present case and required the assessee to clarify certain issues. It was also noticed that the West Bengal Taxation Tribunal (W.B.T.T.), in the assessee’s own case arising under the Sales-tax Act, has held that the assessee-club is not a members’ club, and therefore the principle of mutuality is not applicable. It was further held in that decision that there was no identity between the members and the club, and therefore the principle of mutuality was not applicable. This decision is in Bengal Rowing Club v. CCT [1993] 88 STC 389 (West Bengal Taxation Tribunal). In view of the doubts entertained by the Bench and the clarifications sought for and in view of the decision of the W.B.T.T. in the assessee’s own case, the matter was posted again and the case was argued fully both on behalf of the assessee as well as on behalf of the Department. All the doubts that arose were put to the assessee wherever necessary and clarifications were obtained. The decision of the W.B.T.T. was also put to the assessee. We have obtained clarifications on all the above points. We shall discuss them while giving out the reasons for the conclusions arrived at by us on the facts of the present case.
8. In paragraphs 8 & 9 of the order of the Tribunal for the assessment year 1984-85, it has been held that the assessee is a mutual association and there is no trading or commercial activity. It is further held that all the activities of the club are confined to its members only. One of the doubts which was raised was whether in view of the Rules 12(d), 34 and 39 of the constitution of the club, the principle of mutuality can prevail or subsist when non-members, their families and guests also enjoy and utilise the amenities, facilities and privileges as are available to the members, particularly in view of the decision of the Supreme Court in the case of Royal Western India Turf Club Ltd. (supra). We have heard the Id. counsel for the assessee on this point. The basis on which this doubt has arisen is that Under Clause 4 of the articles of association of the club, there shall be five classes of members namely, ordinary, non-resident, temporary, honorary and rowing members. Under the rules and by-laws of the club, a member and his wife shall have the privilege of introducing and entertaining the guest subject to the rules or by-laws framed from time to time Clause 22(a). It is further provided that the members who introduce the guests shall be responsible for the payment of the expenses of entertaining the guests and shall be responsible also for the observance of the rules of the club by the guests. Under Clause 22(b), members shall pay guest fees as decided from time to time by the Committee. Under Clause 22(c) guests shall always be accompanied by the member who introduces guests or his wife or by the member’s child between 12 and 21 years of age. Under Clause 22(d) no person who is not eligible for membership of the club can be introduced as guest. Under Clause 22(e), no person can be introduced as a guest more than 3 times in a month. Clause 22(f), requires that the club shall maintain a Guest book in the premises of the club and shall enter the names and the addresses of the guests who enter to the club and such entries shall be made at the time of guests entering the club. The above are the rules regarding the introduction of guests by the members. It will be seen from the above that introduction of the guests is a privilege of the members. It is one of the privileges among the various privileges which a member of the club can enjoy once he becomes the member. The club exercises adequate control, as per the by-laws, over the introduction and regulation of the guests. This is clear from the by-laws of the club relating to the guests extracted above.
9. As per the articles of association, the following are the various privileges of the members of the club:
Privileges of Members
12. Ordinary members shall be entitled to the following rights and privileges:
a. To be present and vote at all General Meeting either in person or by proxy, and every ordinary member shall have one vote.
b. To propose and second candidates for Membership.
c. To have personal access to the Library, playing grounds and other public rooms, of the Club and take part in all games and entertainments provided by the Club, subject to such rules and restrictions if any, as may for the time being be prescribed by the Committee.
d. To introduce visitors to the grounds and public rooms of the Club during the hours these are open to members, subject to such rules and restrictions as may for the time being be prescribed by the Committee.
e. To fill any office in the Club on being duly elected thereto.
13. Members other than Ordinary shall not take part or vote in any General Meeting of the Club and shall not have any right in the management of the Club. They cannot be elected as members of the Governing Body of the Club. They are entitled to such of the other privileges of the ordinary members as may be prescribed by the Rules and Bye-laws of the Club.
It will be seen from the above that the privileges and amenities of the club are available to Ordinary Members only. Other classes of members are not entitled to all the privileges listed above. The club has framed separate sets of rules for temporary members, non-resident members, and Rowing members. It is seen from the rules of the club that all the classes of Members do not pay the same entry fee and subscription. Clause 14(a) and (b) of the Articles of Association make this position clear as under:
Entrance fee and subscription
14(a) Terms, conditions and qualifications of each class of members shall be in accordance with the Rules and Bye laws of the Club which may be framed and altered from time to time save and except that the entrance fee and the monthly subscription for the following classes of members shall be as stated below:
Class of Members Entrance fee Monthly subscription, to be
fixed by the Rules & Bye-
laws of the Club but not to
exceed.
Ordinary Such amount not less Rs. 125
than Rs. 18,000 and
not more than Rs.
30,000 as may be fixed
by the Committee from
time to time.
Non-Resident Rs. 2,000
Deceased Members
Wife Rs. 250
Rowing Rs. 30
Temporary Member Nil.
14(b) For purposes of development of the club’s properties and/or construction of any new building the committee may levy a surcharge of such amount not exceeding in the aggregate. Rs. 1,000 on each member other than Rowing and Life members of the club as the committee may from time to time decide towards the ‘Building and Development Fund’ of the club provided that such surcharge may be paid in one or more instalments as the committee may decide and the committee is authorised to modify the amount payable within these limits or withdraw such surcharge as and when it may deem fit in its discretion and judgment and subject to the condition that such surcharge shall not be imposed on such members more than once in every ten years beginning from the date of the first instalment.
As per Clause 16 of the Articles, a member other than the ordinary member may become an ordinary member by applying in the appropriate form and paying the appropriate fees. The Ordinary members, Under Clause 15 of the Articles, are allowed to become life members of the club by making an one-time non-refundable deposit. It will be seen from the aforesaid clauses of the Articles, that there are different types of the members in the assessee-club who are entitled to different privileges and different services-of the club. As per rules 66 to 73 of the general rules of the club. Rowing members shall have the privileges of enjoying all the Rowing facilities of the club free of charge. However, Rowing members are not allowed to introduce guests. He can bring his wife only inside the club premises. Rowing members shall have the privileges of attending all the club functions, but only when invited. There are timings for the use of the Rowing facilities and the Rowing members will have to observe such timings. Under Rule 70, Rowing member cannot use the Card and Billiards rooms of the club or enter the first floor of the club-building unless he is introduced by an Ordinary member as his guest. However, Rowing members can play Badminton or Table Tennis for an additional fee. The Rowing members have to pay their subscription on half yearly basis. Under rule 73, all payments will be made by the Rowing member by coupons available on payment of cash from club.
10. There are similar Rules and Regulations for the Non-resident members as well as the Temporary members.
11. In the case of CIT v. Merchant Navy Club [1974] 96 ITR 261, the Andhra Pradesh High Court was considering the case of a Club which was registered under the Societies Registration Act. The assessee in that case was the Merchant Navy Club. There are three classes of members under the constitution of the Club. They were: (1) sea going officers and ratings of all vessels of the merchant navies visiting Visakhapatnarn; this class of members do not pay any subscriptions; (2) executive members of the staff of the steamship agencies carrying on business in Visakhapatriam and members of the gazetted marine staff of Visakhapatriam Port, and marine surveyors at Visakhapatnarn Port; this class of members pay Rs. 15 or Rs. 10 as annual subscription; and (3) such persons as having close connection with the sea borne trade of Visakhapatnarn; this class of members pay no subscription at all and shall have no voting rights. The High Court noticed the broad distinction made by the Club constitution for admission of paying members as well as non-paying members. After noticing the broad distinction and after referring to the argument of the Department in that case, that non-paying members were not genuine members, and therefore there was no mutuality between the members and the club, the High Court at page 268 held as under:
The paying members contribute to the common fund of the club by paying subscriptions. They also contribute to the club by paying something extra over the cost for the amenities they receive from the club. Similarly, the non-paying members also contribute to the club by paying something extra over the prices of those amenities provided to them by the club. It is, therefore, not correct to say that non-paying members do not contribute to the common fund of the club. On the facts it is evident that both paying members as well as non-paying members as a class contribute to the common fund of the club.
12. It will be evident front this case that the fact that there are various classes of members entitled to different amenities and privileges of the club is not destructive of the principle of the mutuality. The true ratio of the judgment is that restricted participation of the different types of members does not destroy the principle of mutuality.
13. In the case of CIT v. Darjeeling Club Ltd. [1985] 153 ITR 676, the Calcutta High Court was dealing with the case of Darjeeling Club Ltd. That Club had three types of members: (1) permanent; (2) temporary; and (3) honorary. All the three categories of members were entitled to the same privileges as the permanent members. The argument raised on behalf of the Revenue in that case was that there were some temporary and honorary members of the Club and therefore profits arising out of the Club’s dealings with them must be taxed. This contention is adverted to at page 680 of the report. At page 683, the Calcutta High Court specifically rejected this contention. While rejecting the contention, the Court held as under:
The fact that there are some temporary members and some honorary members is quite immaterial. The class of members may diminish or may increase. Some members may retire, some members may die but the class of the members who contribute to the fund remain as a class the same. This aspect of the matter was emphasised by Lord Upjohn in the case of Faulconbridge (H.M. Inspector of Taxes) v. National Employers’ Mutual General Insurance Association Ltd. [1952] 33 TC 103, at page 125;
Finally, viewed in the light of the other cases, I think it is clear that when Lord Macmillan speaks of the cardinal requirement being complete identity between the contributors and the participators, he is not referring to individual identity but to identity as a class, so that at any given moment of time, the persons who are contributing must be identical with the persons who are entitled to participate; whereas it follows, in my judgment, that it matters not that the class has been diminished by persons going out of the scheme or that others may come in in their place in the future.
Therefore, it is not necessary that the members who contribute to the funds of the club must be the identical persons who enjoy the benefit of the excess contribution. What is important is that the members as a class will be entitled to the benefit. The temporary and the honorary members have enjoyed the facilities of the club as members. They have contributed to the funds as members. Any surplus contribution will be held for the benefit of the members. To adopt the phrase used by Lord Cave, sooner or later, in meal or in malt, the benefit of the surplus fund must go back to the members as a class, though not precisely in the proportions in which they have individually contributed to the surplus fund. The fact that the temporary or honorary members may go out of the scheme or other new members may come in will not make any difference to the principle. The surplus that was made out of the dealings and transactions with the members of the club will be retained for the benefit of the members as a class.
14. The above observations of the Calcutta High Court, especially those made in the last paragraph, are a complete answer to the querry specifically raised by us. It is clarified by the Calcutta High Court in that decision that it is immaterial that there are different classes of members entitled to different privileges, and it has been stressed that what is important is that the members as a class must be entitled to the benefits, amenities and privileges provided by the Club. Applying this ratio to the facts of the present case, we find that though there are different classes of members whose rights and privileges are regulated in different ways, the members of the Club as a class are entitled to the privileges of the Club. It is, therefore, not possible to hold that the principle of the mutuality is destroyed merely because the members are allowed to introduce guests or that certain classes of members are not allowed to enjoy the privileges enjoyed by certain other classes of members. The right given to an Ordinary member of the club Under Clause 12(d) of the Articles, to introduce visitors to the premises of the Club subject to the rules and regulations in this regard is referable to his membership in the Club and nothing else. The mere fact that the Ordinary member can introduce guests who can take part in the services offered by the Club is no ground to hold that the principle of mutuality is destroyed. As we have seen earlier, the member introducing the guests is responsible for the payment of the fees of the guest. In no case will the club accept payment directly from the guests. This is made clear by Clause 22(a) & (b) of the general bye laws and rules of the Club. In fact, the CIT (A) in the impugned order has entered a categorical finding on a perusal of the register maintained by the Club. He was fully satisfied that no outsider is admitted to the premises of the Club except the guests. This categorical finding has not been challenged by the Department before us.
15. We may now refer to the judgment of the Supreme Court in the case of Royal Western India Turf Club Ltd. (supra). That decision is clearly distinguishable. In that case, the Club was not acting as an agent of the members for the purpose of providing facilities and supplies to the members only. The Club was acting as a business organisation and had dealings and transactions with the members as well as non-members. The Supreme Court emphasised this aspect of the matter at page 560 of the report. After referring to the famous Styles’ New York Life Insurance Co. v. Styles (Surveyor of Taxes) [1889] 2 TC 460 and the principle of mutuality, the Supreme Court observed as under:
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 that 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.
16. When the company carries on a business activity it can hardly be stated that there is scope for the application of the principle of the mutuality. Therefore, the decision of the Supreme Court is no authority for the proposition that whenever a Club deals with the non-members, such as guests, the principle of mutuality is destroyed and the income cannot be held exempted from tax.
17. There was a reference to Clauses 34 and 39 of the Articles of the Club which are grouped under the heading “powers of the Committee”. Clause 34 says that the Committee may invite distinguished individuals to become patrons of the Club. Clause 39 states that the Committee may organise entertainments, parties, social reunions, picnics etc. and innocent amusements and the expenses of such events shall be met by the Club. Persons who are not members, may also be invited if the Committee thinks fit. These two clauses only deal with the powers of the Committee. It is common to vest such powers with the Committee so that men of letters are made patrons of the Club merely to enhance the reputation and prestige of the Club. As for Clause 39, it is not the case of Department that during the relevant year of account, the Club had organised such parties or amusements where non-members also took part. It is, therefore, not possible to interpret these two clauses as destroying the mutuality principle altogether.
18. It was then doubted whether the subscription paid by the members for the services rendered by the club cannot be taxed In view of the decisions of the Supreme Court in the case of CIT v. Calcutta Stock Exchange Association. Ltd. [1959] 36 ITR 222 and in the case of Delhi Stock Exchange Association Ltd. v. CIT [1961] 41 ITR 495 (SC). under Section 28f (iii) of the Income-tax Act, 1961, income derived by a trade, professional or similar association from specific services performed for its members are taxable as income from business. The fore-runner of this provision in the Act of 1922 was Section 10(6) thereof. The decisions of the Supreme Court cited above were concerned with Section 10(6) of the 1922 Act. In the present case, we are not concerned with the income of any trade or professional or similar association. A trade or professional association is an association of businessmen or professionals to protect their common interests. The assessee can neither be stated to be trade association nor a professional association. The assessee does not carry on any business and this fact is also not disputed. The assessee is purely a members’ Club. In the case of Calcutta Stock Exchange Association Ltd. (supra) and in the case of Delhi Stock Exchange Association Ltd. (supra) the assesses were not members’ Club, but they were trade associations. It was not suggested on behalf of the Department that the assessee was an association similar to a trade or professional association. Even if it is so suggested, that cannot be accepted because the word ‘similar’ in Section 28(iii) has to be interpreted ‘Ejusdem generis’ with the word ‘trade or professional’. A members’ Club such as the present assessee is wholly different from a trade or professional association, and therefore there is no scope for roping the same into the provisions of Section 28(iii). A similar contention was advanced on behalf of the Department before the Delhi High Court in the case of CIT v. Delhi Race Club (1940) Ltd. [1970] 75 ITR 111. That was a case of the Delhi Race Club, which was an incorporated body. The finding of the Tribunal was that the assessee was essentially a members’ club and it was neither a trade nor professional association. On this finding of fact, the contention advanced on behalf of the revenue was expressly repelled by the Delhi High Court. At pages 116 and 117 of the report, the High Court held as under:
The learned Counsel for the revenue had referred to Section 10(6) of the Indian Income-tax Act, 1922, but this has no application to the present case. As held by the Supreme Court in Royal Western India Turf Club case, Section 10(6) has no application, for the assessee is not a trade or professional or other similar association within the meaning of that subsection. Trade association is not the same thing as a trading association. A trade association may be an association of tradesmen to protect their common interest. The asseseee, as found by the Tribunal in the statement of the case, is not such an association; nor is it a professional association. The said section, therefore, does not apply to the case of the assessee.
The cases of Calcutta Stock Exchange Association and of the Delhi Stock Exchange Association are entirely different, as the said associations are not members’ clubs. The receipts sought to be charged in both cases are referable to certain specific services, which are not privileges of membership.
It is, therefore, not possible to countenance the proposition that the subscription paid by the members for the privileges and services enjoyed by them can be taxed under Section 28 (iii) of the Act.
19. The next question was whether in view of Rule 7 of the memorandum of the Club, the principle of mutuality still prevails in view of the decision of the Gujarat High Court in the case of CIT v, Shree Jari Merchants Association [1977] 106 ITR 542. Rule 7 of Memorandum of Association of the Club is as under:
If upon the winding up or dissolution of the Club there remains after the satisfaction of all its debts and liabilities any property whatsoever the same shall not be paid to or distributed among the members of the Club but shall be given as a gift to the Calcutta Pinjrapole or any other Calcutta Institution to be determined by the Ordinary members for the time being of the Club.
The view of the Gujarat High Court has not found favour with the Madras, Andhra Pradesh and Kerala High Courts. These High Courts have held that the test of mutuality does not require (hat contributors of the common fund should willy-nilly distribute the surplus amongs themselves. It has been held in these decisions that it is enough if the contributors to the fund have a right of disposal, over the surplus and in exercise of that right they may agree that on winding up of the association or the Club, the surplus will be transferred to a similar association for use for some charitable objects (please see the following decisions):
1. In CIT v. Madras Race Club [1976] 105 ITR 433 (Mad.)
2. In CIT v. West Godavari District Rice Millers Association [1984] 150 ITR 394 (A.P.)
3. In CIT v. Cochin Oil Merchants’ Association [1987] 168 ITR 240 (Ker.).
In view of this predominant judicial opinion, we have to follow the same and hold that the principle of mutuality is not destroyed, because of the provisions of Rule 7 of the Memorandum of Articles of Association.
20. Another doubt which arose on which clarification was sought by us was whether the assessee-club will be caught within the ratio of the Bombay High Court in Royal Westeran India Turf Club Ltd, v. CIT [1970] 78 ITR 548. We have perused the judgment carefully. The Bombay High Court. was dealing with the case of Royal Western India Turf Club Ltd. (supra). In that very case, the Supreme Court had earlier held in Royal Western India Turf Club Ltd.’s case (supra) that the assessee was carrying on the business of horse racing. The question before the Supreme Court at the instance of the assessee was whether the loss shown by the assessee In the Club house and the Kiosks cannot be allowed as business loss or business expenditure. The case of the assessee was that the maintenance of the Club house and Kiosks was incidental to the business of horse racing, and therefore the loss or the expenditure in the maintenance of Club house and Kiosks must be allowed as business loss or business expenditure. The High Court accepted this contention. It will be noticed that, the very object of the Club was to carry on the business of horse racing. It was not held by the Bombay High Court as a general proposition that the provision of facilities and amenities of the Club to the members or their families or guests would constitute business activity. The Supreme Court had already held in the case of the same assessee that the assessee was carrying on the business of horse racing and that of hotel keepers, etc. The decision of the Bombay High Court thus rested on this basic finding. In the. present case, it is not suggested on behalf of the Department that the assessee is carrying on the business of providing facilities and amenities to the members. The decision of the Bombay High Court having been rendered on the basic finding that the assessee therein was carrying on a business, that decision is distinguishable and does not apply to the facts of the present case.
21. The other clarification sought was on the question of applicability of the judgment of the Supreme Court in the case of CIT v. B.M. Kharwar [1969] 72 ITR 603 and in the case of Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790. These two decisions are authority for the proposition that the legal effect of a transaction has to be given effect to and that; the substance of the matter need not be probed by the departmental authorities. The proposition laid down in these two decisions are not relevant for the purpose of deciding the present appeal. The fact of the present, appeal depends only on the question whether the principle of mutuality is applicable on the facts of the case. These decisions are therefore not relevant for deciding the present appeal.
22. The only other point that remains to be clarified is the applicability of the decision of the W.B.T.T. in Bengal Rowing Club’s case (supra). That decision was rendered in the assessee’s own case. At paragraphs 36 and 37 of the order, the Tribunal held as under:
36. It appears from the constitution of the applicant-club that there is a class of members known as rowing members, who cannot take part or vote in any general meeting and do not have any right in the management of the club. They cannot be elected as members in the governing body. They are entitled to such of the other privileges of the ordinary members as may be prescribed by the rules and the bye-laws. They are governed by the special rules applicable to them. According to these rules, a. rowing member is not permitted to introduce guests but, however, can bring his wife only inside the club premises. He can enjoy certain club facilities like playing badminton, table tennis free of charge and use the swimming pool on payment of a free. As regards cards and billiard rooms, these can be used by him only as a guest of an ordinary member. Refreshments can be served to them and all payments are required to be made by the rowing members by coupons available on cash.
37. It is evident from the foregoing paragraph that rowing members, though not shareholders of the club, enjoy certain club facilities and the club has direct relationship with them in certain matters. They can have refreshments and pay for these directly to the club and not as guests of members and the club. In the matter of supply of refreshment it cannot be held that the club has transactions only with its constituent members, that is, the principal. It has transactions with others also, who are not the principal. The obvious conclusion is that the applicant-club is not a members’ club and hence the question of agency does not arise at all.
Mr. Bajoria, the Id. counsel for the assessee sought to clarify the order of the W.B.T.T. It was submitted by him that the point was taken by the Tribunal suo motu and the assessee did not have an opportunity of clarifying the issue before the Tribunal. It was further pointed out by him that though he had cited the decisions of the Andhra Pradesh High Court in the case of Merchant Navy Club (supra) and the Calcutta High Court in Darjeeling Club Ltd.’s case (supra), the Tribunal did not discuss these two decisions or advert to the principles laid down therein. Our attention was also drawn to paragraph 29 of the order, wherein the aforesaid decisions are referred to. The W.B.T.T. has held that in the matter of supply of refreshment, it cannot be held that the club had transacted only with its constituent members, and therefore the club was not a mutual association. The Tribunal has moreover held that the surplus in the catering establishment was also used for giving benefits of the rowing members, and therefore there was no mutuality. Adverting to these findings of the W.B.T.T., Mr Bajoria submitted that these findings are contrary to the principles laid down by the jurisdictional High Court in Darjeeling Club Ltd.’s case (supra) and also to the decision of the Andhra Pradesh High Court in Merchant Navy Club’s case (supra). Mr Bajoria submitted that we are not bound by the decision by the W.B.T.T. and it is open to us to hold, on the basis of the judgment of the jurisdictional High Court, that the mere fact that the club had dealings with its rowing members did not lead to the conclusion that the principle of mutuality was destroyed, and therefore the income should be subjected to tax. In this connection, he drew our attention to various passages and observations in the aforesaid two decisions, as supporting his contention that merely because there were different classes of members, the principle of mutuality was not destroyed.
23. We have gone through the order of the W.B.T.T. carefully. We agree with Mr. Bajoria that though the two decisions cited supra were cited by him before the W.B.T.T., the principles laid down in those two decisions have not been applied to the facts of the case. Normally, the order of the W.B.T.T. in the assessee’s own case rejecting its contention, though not binding on us, would have persuasive value. However, if it is found that the principles laid down by the jurisdictional High Court on the basic issues have not been kept in view or adverted to by that Tribunal, it would be open to us to hesitate to follow the order of the W.B.T.T. and take our own view on the facts of the present case applying the principles laid down by the jurisdictional High Court.
24. The judgment of the Calcutta High Court cited above, as stated elsewhere in this order, was concerned with the Darjeeling Club Ltd.’s case (supra). The observations of the Calcutta High Court at page 683 have already been extracted in the earlier part of our order. To recapitulate, it has been categorically held by hte High Court that (i) it is not necessary that the members who contribute to the funds of the Club must be the identical persons who enjoy the benefit of excess contribution, (ii) members as a class should be entitled to the benefit, (iii) the fact that there are different classes of members is quite immaterial. In view of these categorical principles laid down by the Calcutta High Court, it is not possible to accept the order of the W.B.T.T. that merely because the rowing members do not have any direct relationship with the other membes of the Club in certain matters, there is no identity between the contributors to the funds and the participators of the fund or that the principle of mutuality has been destroyed. The Andhra Pradesh High Court, in the decision cited above has held that restricted participation by certain classes of members does not mean that there is no mutuality. It was further held by the Andhra Pradesh High Court that what is important is that there must be some contribution by the members towards the common fund and the members as a class must be entitled to participate in the surplus. At page 273 of the report, the High Court concluded as follows:
No person can trade with himself and make an assessable profit. If instead of one person more than one combine themselves into a distinct and separate legal entity for the purposes of rendering services to themselves or for the supply of refreshments, beverages, entertainment, etc., by over-charging themselves, the resulting surplus is not assessable to tax if the surplus is to be refunded to the members. The contributors to the common fund and the participators in the surplus must be an identical body. That does not mean that each member should contribute to the common fund or that each member should participate in the surplus or get back from the surplus precisely what he has paid. What is required is that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. It is immaterial whether the surplus is paid back to the members in cash or is put to reserve with the club for its development and for providing better amenities to its members. When the body of individuals is incorporated into a company or formed into a registered society, what is essential is that it should not have dealings with an outside body which results in surplus. The participation of the members in the surplus must be in their character as contributors to the common fund or as consumers, and not as shareholders getting dividends on their share amount or as debenture holders earning interest. In all cases of incorporation as a company or as a registered society, the proper mode of regarding the company or the registered society is that it is a convenient instrument or medium for enabling the members to conduct a social club, the objects of which are immune from every taint of commerciality. The property of the incorporated company or a registered society, for all practical purposes in this behalf, is considered as property of the members. A members’ club formed for social intercourse and for either recreation or for cultural activities cannot be considered to trade for profit so as to make its surplus taxable in law when it over-charges its members for the supply of refreshments, beverages or amenities to its members. Such supplies are not sales as there is no element of transfer of property in them.
25. We are of the opinion that principles laid down by the Andhra Pradesh and Calcutta High Courts are fully applicable to the facts of the present case. The assessee is a company registered under Section 25 of the Companies Act. Payment of dividend by the assessee to its members is strictly prohibited. Clause 5 of the Memorandum of Association puts a total embargo on the distribution of profits to the members. Clause 5 of the Memorandum of Association is reproduced here;
The income and property of the Club whensoever derived shall be applied solely towards the promotion of the objects of the Club as set forth in his Memorandum of Association and no portion thereof shall be paid or transferred directly or indirectly by way of dividend or bonus or otherwise howsoever by way of profit to the persons who at any time are to have been members of the Club or to any of them or to any person claiming through any of them, provided that nothing herein contained shall prevent the payment in good faith, of remuneration to any officers or servants of the Club or to any member thereof or other persons in return for any services actually rendered to the Club or the payment of interest on money borrowed from any member of the Club.
Therefore, there is no justification for making a departure from the view held by the Tribunal in the assessment year 1984-85 regarding the taxability of the assessee’s income. While on this aspect of the matter, we can usefully refer to the decision of the Madras High Court in the case of Presidency Club Ltd. v. CIT [1981] 127 ITR 264, where the High Court held that unless a members’ club indulged in a trade or business with a profit-motive whether exclusively with its members or with non-members also, there can be no assessable income. It was held that the position of a club which does not carry on any commercial activity would be wholly different and the basic principle of mutuality that one cannot make any profit out of himself would apply to all non-commercial activities. In the present case, as we have seen, there is no profit motive and it is not suggested on behalf of the Department that the Club is carrying on a business or trade with profit-motive. Clause 5 of the Memorandum of Association extracted above also prohibit any payment of dividend or distribution of profits of the Club to its members. It is, therefore, clear that this is a case where there is no activity which was designed to make any profit as such, and the profit, if any, was only incidental to the activities which are mutual in nature. The surplus, if any, arising out of the activities reaches the members in their capacity as members and not otherwise. The grounds raised by the Department are therefore without merit and cannot be accepted. However, we find that the assessee derived income of Rs. 40,767 as interest on Fixed Deposit. The interest subject to the deduction available under the Act is to be taxed since it arises out of the investment of the Club property and cannot be held to be exempted on the principle of mutuality. In this connection reliance is placed on the judgment of the High Court, Gujarat, In the case of Sports Club of Gujarat Ltd. v. CIT [1988] 171 ITR 504.
26. The cross-objection is mainly in support of the order of the CIT (A). In Ground Nos. 2 & 3 of the cross-objection, the assessee has questioned the reopening of the assessment under Section 143(2)(b). However, these grounds were not argued at the time of hearing, The cross-objections are therefore dismissed.
27. The appeal of the Department is partly allowed.