Holding

Receipts from members for club facilities are not a trading activity and the resulting surplus is not taxable income under Section 28(i), so the doctrine of mutuality applies.

Summary

The Supreme Court examined whether receipts received by several members' clubs, including Bankipur Club Ltd., for drinks, refreshments, rent, admission fees and subscriptions constitute taxable income under the Income‑Tax Act. The clubs, registered as non‑profit companies under Section 25 of the Companies Act, claimed exemption on the basis of the doctrine of mutuality, arguing that the surplus over expenditure was not income because the transactions were solely for members' privileges and not for profit. The Court held that such receipts are not a "trading activity" within Section 28(i) and the surplus does not amount to taxable income. It affirmed the High Courts' findings that the clubs’ activities were non‑commercial and that the mutuality doctrine applied. Consequently, all sixteen appeals filed by the Revenue were dismissed with costs.

Issues considered

Whether receipts from members for drinks, refreshments, rent, admission fees and subscriptions constitute taxable income under Section 28(i) of the Income‑Tax Act.
Whether the doctrine of mutuality applies to exempt such receipts from tax.
Whether the High Courts' determinations that the clubs' activities were non‑trading are correct.
At what point the relationship of mutuality ends and a trading activity begins.

Legislation cited

Companies Act, 1956s. 25
Income Tax Act, 1961s. 2, s. 256(1), s. 256(2), s. 28(i)

Subjects

mutual clubtrading activityIncome Tax ActSection 28(i)mutuality doctrinenon‑profit companytax exemptionsurplus receipts

Judgment

COMMISSIONER OF INCOME TAX, BIHAR A
v.
BANKIPUR CLUB LTD.

MAY 8, 1997
B
[KS. PARIPOORNAN ANDS. SAGHIR AHMAD, JJ.]

Income Tax Act, 1961: Section 28(i).

Income tax-AYs. 1960-61 to 1964-65, 1974-75 to 1976-77, 1982-83,
1985-86 to 1989-90-Member's clubs/social action groups-Registered as non- C
profit companies under S.25 of Companies Act-Such clubs received from
their members amounts for supply of drinks, refreshments etc. as part of usual
privileges, advantages and conveniences available to members or by way of
admission fees and periodical subscriptions-Memoranda of Association
provided for distribution amongst members, or transfer to· a similar associa- D
tion as detennined by members, of the surplus amount, if any, on winding up
or dissolution of clubs-Profits-Surplus receipts of-Taxability of-Held:
Under such circumstances, the said receipts from members, not a "trading
activity''-Therefore, the excess of such receipts over expenditure, not a taxable
income.
E
Section 2~Income tax-Income from house property-Ays. 1977-78
and 1978-79-Member's clubs/social action groups-Registered as non-profit
companies under S.25 of Companies Act-Accommodation in the buildings
of clubs provided to members as part of usual privileges, advantages and
conveniences on payment of rent-Memoranda of Association provided for
participation of members in surplus on winding up or dissolution of F
clubs-Held: Under such circumstances, the excess of the rent received over
expenditure, not a taxable income-Companies Act, 1956, S.25.

Income tax-Business income-Member's club or mutual con-
cern-Held: At what point, does the relationship of mutuality end and that of G
trading begin, is a difficult and vexed question-A host offactors may have
to be considered to arrive at a conclusion.

Income tax-Business income-Mutual club-Held: Whether or not
persons dealing with each other, is a "mutual club" or carrying on a trading
activity or an adventure in the nature of trade, is largely a question of fact. H
263
264 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.

A Words and phrases:

"Trading activity"---Meaning of-f.n the context of S.28 (i) of the Income
Tax Act 1961.

The respondents were "Members' Clubs"/ "social action groups" and
B
were companies registered under Section 25 of the Companies Act, 1956
as "non-profit companies". The respondents were assessees to income tax
and the assessment years involved were 1960-61 to 1964-65, 1974-75 to
1976-77, 1982-83, and 1985-86 to 1989-90. The respondents received from
their members amounts for supply of drinks refreshment etc. as part of
C usual privileges, advantages and conveniences available to members as
such or by way of admission fees and periodical subscriptions. The respon-
dents also received rent for providing accommodation in their buildings
to their members as part of usual privileges, advantages and conveniences.
The Memoranda of Association provided for distribution amongst the
D members, or transfer to a similar association as determined by the mem-
bers, of the surplus amount, if any, on winding up or dissolution. The
respondents claimed exemption from income tax on their "surplus
receipts" on the grounds that they were "mutual clubs" - a species of mutual
undertaking, and did not carry on any "trading or business" - and that they
did not earn any profit.
E
The High Court held that the aforesaid amounts received by the
respondents were only for/towards charges for the privileges, conveniences
and amenities provided to the members, which they were entitled to as per
the rules and regulations of the respective clubs without any profit motive
p and, therefore, the respondents were entitled to exemption from income
tax in respect of the "surplus receipts". Being aggrieved the appellant-
Revenue preferred the present appeal.

Dismissing the appeal, this Court

G HELD : 1. The receipts for the various facilities extended by the clubs
to its members, as part of the usual privileges, advantages and convenien-
ces, attached to the membership of the club, cannot be said to be "a trading
activity". The surplus - excess of receipts over the expenditure - as a result
of mutual arrangement, cannot be said to be "income" for the purpose of
H the Income Tax Act, 1961. [277-E-F]
C.l.T., BIHAR v. BANKIPUR CLUB LTD. [PARIPOORNAN,J.) 265

CIT v. Bankipur Club Ltd., 129 ITR 787 (Pat.); CIT v. Ranchi Club A
Ltd., 196 ITR 137 (Pat.) (FB) and CIT v. Northern India Motion Pictures
Association, 180ITR160 (P&H), approved.

CIT v. Royal Western India Turf Club Ltd., 24 ITR 551; CIT v. Kum-
bakonam Mutual Benefit Fund Ltd., 53 ITR 241.and Fletcher v. Income Tax
Commissione1; [1971] 3 All ER 1185, referred to. B
Carlisle and Silloth Golf Club v. Smith, (1913) 3 K.B. 75, cited.

Kanga & Palkhivala: "The Law and Practice of Income Tax" (8th Edn.
Vol. I, 1990), Halsbury's Laws of England, 4th Edn. Reissue Vol. 23, Simon's
Taxes Vol. B 3rd Edn. and British Tax Encyclopedia (I) 1962 Edn., referred C
to.

2. "At what point, does the relationship of mutuality end and that of
trading begin" is a difficult and vexed question. A host of factors may have
to be considered to arrive at a conclusion 'Whether or not the persons
dealing with each other, is a "mutual club" or carrying on a trading activity D
or an adventure in the nature of trade", is largely a question of fact.
[278-C-D]
Wilcock's Case, 9 Tax Cases 111, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 854-858 E
of 1994 ETC.

From the Judgment and Order dated 14.10.80 of the Patna High
Court in T.C. Nos. 46-50 of 1970.

J. Ramamurthy, Harish N. Salve, S. Rajappa, Dhruv Mehta, B. F
Krishna Prasad, P. Parmeswaran, D.S. Mehra, U.A. Rana, Rajiv Tyagi,
Sudhanshu Tripathi, MJ.S. Rupal, D.P. Mukherjee, Sanjoy Kumar Ghosh,
(Manoj Swamp), for Manoj Swarup & Co., S.K. Aggrawal, Vinay Yaish
and Arnarendra Sharan for the appearing parties.

The Judgment of the Court was delivered by G
PARIPOORNAN, J. Special leave granted in SLP (C) 22644/94 and
2811/94.

2. This batch of 23 cases was posted together. That was so done on the
basis that the same and identical point arises for consideration in all of ·H
266 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.

A them. On further verification, it turned out that in 7 appeals, the point that
arises for consideration is little different. On the question arising in those
appeals no arguments were advanced. So, the said seven appeals are de-
linked, to be posted later for hearing.

3. For convenience sake, the 23 cases including seven appeals which are
B de-linked can be classified into 5 groups. Group-A: C.A. Nos. 854-858/86
Commissioner of Income-tax, Bihar v. M/s. Bankipur Club Ltd. Group-b:
C.A. Nos. 505/92 and 3974/92; Commissioner of Income-tax, Bihar-II v.
Ranchi Club Ltd.; Group-C: C.A. No. 3382/97 (arising out of SLP (C) No.
22644/94 and C.A. No. 10194/95; Commissioner of Income tax, Bombay v.
C Cricket Club of India; Group-D: C.A. Nos. 1635/94, 1648-49/94, 2380-82/94
and C.A. No. 3383/97 (arising out of SLP (C) No. 2811/94); Commissioner
of Income tax, Jalandhar v. Northem India Motion Pictures Association;
Group-E: C.A. Nos. 4777-78/89, 4534/91, 8045/95, 1773(NT)/92, 4303/95
and 3840/96 and Commissioner of Income tax, Kanpur v. Cawnpore Club
Ltd.
D
4. As stated earlier, the appeals coming within Group-E - CIT, Kanpur v.
Cawnpore Club Ltd. (seven appeals) are delinked and they will be posted
separately to be heard on merits. We shall indicate the reason for this a
little later.
E 5. We heard counsel. The following vital aspects should be borne in mind
in adjudicating the question that arises for consideration in this batch of
16 appeals (covered by Groups A to D). The Revenue is the appellant in
all the appeals. The respondents in all the appeals are "Members' clubs".
They are also called "social action groups". They are all companies,
F registered under Section 25 of the Companies Act, 1956 - "non- profit
companies". The respondents are assessees to income tax. They claimed
exemption on their "surplus receipts" on the ground that they are "clubs" -
a species of mutual undertakipg, and do not carry on any "trade or
business". They do not earn any profit. The income received by the clubs by
G extending facilities to non-members is not in issue in this batch of appeals.
According to Revenue, even the surplus receipts of the clubs by affording
facilities to its members, is "income" and so, taxable. That is the sole
question arising for consideration in this batch of appeals.

6. Under the Income-tax Act (hereinafter referred to as 'the Act') what is
H taxed is, the "income, profits or gains earned or "arising'', "accruing" to a
C.I.T., BIHAR v. BANKIPURCLUBLID. [PARIPOORNAN,J.] 267

person". The question is whether in the case of Members' Clubs - a species A
of mutual undertaking - in rendering various services to its members which
result in a surplus, the club can be said to "have earned income or profits".
In order to answer the question, it is necessary to have a background of
the law relating to "Mutual trading" or "Mutual undertaking" and a
"Members' Club". B
7. In Halsbury Laws of England, 4th Edition, Reissue Volume 23
paras 161 and 162 (pages 130 and 132), the relevant law is stated thus :-

"Where a number of persons combine together and contribute
to a common fund for the financing of some venture or object and C
will 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 participators. If these requirements are
fulfilled, it is immaterial what particular form the association takes. D
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 E
mutuality of the enterprise.

xx xx xxxxx xxxx

Members' clubs are an example.of a mutual undertaking; but,
where a club extends facilities to non-members, to that extent the F
element of mutuality is wanting .............".

(Emphasis supplied).

Simon's Taxes Vol. B 3rd Edition, paragraphs Bl.218 and Bl.222 (pages G
159 and 167), formulate the law on the point, thus :

"....... .it is settled law that if the persons carrying on a trade do so
in such a way that they and the customers are the same persons, no
profits or gains are yielded by the trade for tax purposes and
therefore no assessment in respect of the trade can be made. Any H
268 SUPREME COURT REPORTS [1997] SUPP. l S.C.R.

A surplus resulting from this form of trading represents only the
extent to which the contributions of the participators have proved
to be in excess of requirements. Such a surplus is regarded as their
own money and returnable to them. In order that this exempting
element of mutuality should exist it is essential that the profits
B should be capable of coming back at some time and in some form
to the persons to whom the goods were sold or the services
r~ndered ............".

"It has been held that a company conducting a members' (and not
a proprietary) club, the members of the company and of the club
c being identical, was not carrying on a trade or business or under-
taking of a similar character for purposes of the former corporation
profits tax.
t
A members' club is assessable, however, in respect of profits
D derived from affording its facilities to non-members. Thus, in .
Carlisle and Silloth Golf Club v. Smith, (1913) 3 K.B. 75, where a
members' golf club admitted non-members to play on payment of
green fees it was held that it was carrying on a business which
could be isolated and defined, and the profit of which was asses-
E sable to income tax. But there is no liability in respect of profits
made from members who avail themselves of the facilities provided
for members."

(emphasis supplied)
F
In British Tax Encyclopaedia (I) 1962 edition (edited by G.S.A.
Wheatcroft) at pages 1200 and 1201, dealing with "Mutual trading opera-
tions", the law is stated, thus :-

"In several early cases there were dicta to the effect that a man
G could not make a profit by trading with himself; this developed
into the proposition that when persons contribute to a common
fund in pursuance of a scheme for their mutual benefit, having no
dealings or relations with any outside body, they cannot be said to
have made a profit when they find they have overcharged them-
H selves and that some portion of their contributions may be safely
C.I.T.,BIHAR v. BANKIPURCLUBLID.[PARIPOORNAN,J.] 269

refunded. It has also been established that the same principle A
applies although the contn"butors incorporate themselves into a
separate entity to carry out the mutual scheme and the surplus
contributions are put to reserve and not immediately returned. For
this doctrine to apply it is essential that all the contributors to the
common fund are entitled to participate in the surplus and that all B
the participators in the surplus are contributors, so that there is
complete identity between contributors and participators. This means
identity as a class, so that at any given moment of time the persons
who are contributing are identical with the persons entitled to
participate; it does not matter that the class may be diminished by C
persons going out of the scheme or increased by others coming in.

The doctrine now has application in three areas. First, it applies
to mutual insurance companies; secondly, it applies to certain
municipal undertakings and, thirdly, to members' clubs, and mutual D
associations generally, whether incorporated or unincorporated,
except registered industrial and provident societies...............".

(emphasis supplied)
E
It should be noticed that in the case of "mutual society or concern"
(including a "Members' club"), there must be complete identity between
the class of contributors and the class of participators. The particular label
or form by which the mutual association is known, is of no consequence.
The said principle which has been laid down in the leading decisions and
F
emphasised in the leading English text books mentioned above, has been
explained with reference to Indian decisions in "The Law and Practice of
Income Tax" (8th edition vol. I, 1990) by Kanga & Palkhivala at page 113,
thus :-

"..... "The contributors to the common fund and the participators G
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." The Madras, Andhra Pradesh
and Kerala High Courts have held that the test of mutuality does H
270 SUPREME COURT REPORTS (1997) SUPP. l S.C.R.

A not require that the contributors to the common fund should
willy-nilly distribute the surplus amongst themselves : it is enough ·-
if they have a right of disposal over the surplus, and in exercise of
that right they may agree that on winding up the surplus will be
transferred to a similar association or used for some charitable
B objects ...........".

8. The crucial issue that arises for consideration in cases where it is
claimed that on the basis of the principle of mutuality, the receipts by the
"society" or "club" is exempt from taxation, has been succinctly stated by
the Judicial Committee of the Privy Council in Fletcher v. Income Tax
C Commissioner, (1971) 3 All ER 1185 at page 1189, thus :

"........ Is the activity, on the one hand, a trade, or an adventure
in nature of trade, producing a profit, or is it, on the other, a mutual
t
arrangement which, at most, gives rise to a surplus?"

D In substance, the arrangement or relationship between the club and its
members should be of a non-trading character.

9. In C.A. Nos. 854-858/84 (Group-A), the assessee is M/s. Bankipur
Club Ltd .. The appeals are preferred against the common judgment of the
E Patna High Court rendered in T.C. No. 46-50170 dated 14.10.1980 reported
as Commissioner of Income- tax, Bihar v. Bankipur Club Ltd. (129 ITR 787).
The questions referred to the High Court are the following :

"(i) Whether, on the facts and in the circumstances of the case,
the profits arising from the sales made to the regular members of
F the club is entitled to exemption on the doctrine of mutuality?

(ii) Whether, on the facts and in the circumstances of the case, the
directions given by the Tribunal are valid in law?"

The assessment years involved are 1960-61 to 1964-65. The assessee club
G filed "nil" returns. The assessee had income from house property and also
from business or profession. The receipt under the head "sale of drinks at
the Bar" was alone disputed in all the aforesaid five years. The Income Tax
Officer held that the profit on the sale proceeds of the drinks by the club
is .income and so, liable to be taxed. It is seen that the main object of the
H club, as per the memorandum of association, is to afford to its members
C.I.T., BIHAR v. BANKIPUR CLUB LID. (PARIPOORNAN, J.] 271

all the usual privileges, advantages, conveniences and accommodation of a A
club. Clause 5 of the memorandum of association makes a provision that
upon a winding-up or dissolution of the company, if there remains any
property left after the satisfaction of all debts and liabilities, the same shall
be paid to and distributed amongst the members of the company in equal
shares. Article 6 of the Articles of Association reads thus :- B

"Only permanent members shall be deemed to be members of
the club."

Article 15 speaks of temporary members who may be elected for non
exceeding three months in any calendar year. To become a temporary C
member the person would be a person not permanently residing at Patna
or within ten miles of it. No entrance fee is payable by them, but they are
to pay a fixed monthly subscription. Under Article 5, the Governor and the
Chief Minister of the State may be invited by the qmmittee to become
honorary members of the club. Article 17 is a proviil'ion for giving to the D
. temporary and the honorary members all the privileges of the club, subject
to such restrictions and regulations as may be prescribed by the rules or
bye-laws of the club. They have, however, no right to vote at a meeting or
be elected on committees or bring any guest. The assessments were upheld
by the Appellate Assistant Commissioner. In Second Appeal, the appellate
• tribunal accepted the plea of the assessee that the principle of mutuality E
would apply in regard to the sale of drinks at the bar. It was held that as
regards sales to regular members the profit arising from sales to them is
not liable to be taxed under the principle of mutuality. The High Court
adverted to the fact that nobody is allowed to enjoy the privileges of the
club other than its members who may be either permanent members or F
temporary members and the bar in question where drinks are sold is open
to its members, both permanent as well as te~porary, and that no outsider
can purchase any drink from the said club. The High Court took the view
that while selling drinks to its members, it is not done with motive of profit
earning which can be said to be tainted with "commerciality". The members
pay the monthly subscription and in addition, they enjoy the benefit of this G
privilege of supply of drinks to them on additional payment and so, there
is no profit earning motive so far as this transaction is concerned. The
Court concluded that the profits arising from the sales of drinks at the bar
to the regular members of the club is entitled to exemption on the doctrine
of "mutuality". H
272 SUPREME COURT REPORTS [1997] SUPP.1 S.C.R.

A 10. In C.A. NO. 505192 and C.A. No. 3974/92 (Group-B), the assessee
is Ranchi Club Ltd. The main decision is one rendered in T.C. 54/80,
subject matter of C.A. 505/92. The judgment is dated 24.9.1991 and is
reported in Commissioner of Income-tax v. Ranchi Club Ltd. (196 ITR 137
(FB)]. The questions referred to the High Court are as follows ;-

B "(1) Whether, on the facts and in the circumstances of the case,
the Tribunal has rightly held that the assessee-club is a 'mutu,al
concern'?

(ii) Whether, on the facts and in the circumstances of the case, the
Tribunal has rightly held that the income derived by the assessee-
c club from its house property let to its members and their guests is
not chargeable to tax?

(iii) Whether, on the facts and in the circumstances of the case,
the Tribunal has rightly held that the income derived by the
D assessee-club from sale of liquor, etc., to its members and their
guests is not taxable in its hands?"

In these cases, the assessee was a company formed with the main
object of providing a club house and other conveniences for the use of its
E members and their friends .. The memorandum of association provided for
contribution by the members to the common fund of the club, guarantee
towards debts and liabilities, and upon winding up, their participation
in the surplus. Apart from the concept of "member" envisaged in the
memorandum, it had created one more class described as temporary
members. The temporary members were not deemed to be members.
F For the assessment year 1977-78, the assessee had filed its return show-
ing its income under the '1Ead "House property" representing the income
arising out of gross rent and reservation charges received by it from
persons other than members. But, the Income-tax Officer, while assessing
the income, also included the amount received by the assessee even from
G its members on account of rent from the club property and the receipts on
sale of liquor, etc., to its members and their guests. The decision rendered
by the High Court as summarised in the head- note (196 ITR 137 at
page 139) is as follows :-

"... that merely because the assessee company company had
H entered into transactions with non-members and earned profits out
C.l.T., BIHAR v. BANKIPUR CLUB LID. [PARIPOORNAN,J.] 273

of transactions held with them, its right to claim exemption on the A
principle of mutuality in respect of transactions held by it with its
members was not lost. 'The assessee was a mutual concern. The
income derived by it from its house property let to its members and
their guests and from the sale of liquor, etc. to its members and their
guests was not taxable in its hands." B

(emphasis supplied)

11. C.A. No. 10194/95 and C.A. No. 3382/97 (arising out of SLP (C)
22644/94) relate to the assessee, the Cricket Club of India. The proceedings
relate to Assessment years 1977-78 and 1978-79. Amongst others, the C

-
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 D
members. Following the decision rendered. by the Appellate Tribunal,
Bombay Bench-A, for the assessment years 1974-75 and 1976-77 rendered
in ITA 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, E
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
F
the provisions of Sections 22 to 26 of the Act?" The decision was followed
for the assessment year 1978-79 - C.A. 10194/95 and the High Court
declined to refer any question of law for this year as well. 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 G
mutuality, was not doubted by the High Court, holding that no referable
question of law arose for its decision.

12. We now come to Group-D. In C.A. Nos. 1635/94, 1648- 49/94,
2380-82/94 and C.A. 3383/97 (@ SLP 2811/94) come within this group. The H
274 SUPREME COURT REPORTS [1997] SUPP. 1 S.C.R.

A assessee in this case is Northern India Motion Pictures Association. The
details with regard to the above appeals are as follows :

S. No. ASSESSMENT
No. REMARKS
YEARS
1. CA No. 1635 of 1987-88 Appln. U/S. 256
B 1994 (2) rejected
2. CA Nos. 1648-49 1982-83 & 1985- - do -
of 1994 86
3. CA Nos. 2380-82 1974-75 to 1976- Reference answ-
of 1994 77 ered in favour of
c asses see
4. SLP (C) No. 2811 1989-90 Appln. U/S. 256
of 1994 (2) rejected

The assessee is an association consisting of Film Distributors and Ex-
D hibitors incorporated as a company under Section 25 of the Companies
Act, 1956 (Section 26 of the Companies Act, 1913) in the year 1949. The
income of the Association consists of (i) admission fees, readmission fees,
periodical subscriptions from the members, etc. under the head "others"
and (ii) service charges from the members for rendering specific services
E to the members under the head "Service to the members". The income
under the head "Service to the members" was always offered for tax and
assessed to tax under Section 28 (iii) of the Act and there is no dispute about
the same. The income under the head "others" was claimed to be not
taxable on the principle of mutuality. The claim of the assessee for exemp-
F tion from levy of tax, on the ground of "mutuality" was denied in view of
clause 7 of the Memorandum of Association of the Assessee which was to
the following effect:-

"If upon the winding up or dissolution of the Association there
remains after the satisfaction of all its debts and liabilities any
G property whatsoever the same shall not be paid to or distributed
amongst the members of the Association but shall be given or
transferred to such other institution or institutions having objects
similar to the objects of the Association to be determined by the
members of the Association at or before the time of dissolution or
H in default thereof by the Prime Minister of East Punjab, and if and
C.I.T., BIHAR v. BANKIPUR CLUB LTD. [PARIPOORNAN, J .] 275

sci far as effect cannot be given to the aforesaid provision then to A .
some charitable object."

(emphasis supplied)

In an earlier assessment year, 1977-78 an identical question relating
to the same assessee arose before the High Court of Punjab & Haryana in B
ITR No. 69/81. The decision thereon dated 27.4.1989 is reported in Com-
missioner of Income-tax v. Northern India Motion Pictures Association [180
ITR 160]. The following questions were referred to the High Court :-

"(1) Whether, on the facts and in the circumstances of the case, C
the principle of mutuality is applicable to the assessee's receipts
under the head 'Others'?

(2) Whether, on the facts and in the circumstances of the case, the
Tribunal was right in holding that the receipts under the head
'Others' were neither income liable to be taxed under the head D
'Business' nor under the head 'Other sources'?

The facts in the said cas~ and the decision by the High Court are neatly
summarised in the head note of the reports at pages 160-161 :-

"The assessee was ·an association and its members were film E
distributors and exhibitors. The association protected the rights of
its members in return for admission fees and periodical subscrip-
tion and also rendered specific services in return for separate
charges. The Income-tax Officer wanted to subject the assessee to
tax on the income derived from the admission fee, periodical F
subscriptions and specific service charges received from the mem-
bers. The assessee pleaded that the receipts were exempt from tax
on the general principle of mutuality. The Income-tax Officer did
not agree with the plea on the grounds that in clause 7 of the
memorandum of association, it was pro~ded that, upon winding
up or dissolution of the association, the remaining property, after G
the satisfaction of its debts and liabilities, shall not be paid or
distributed amongst the members but shall be given or transferred
to such other institution or institutions having similar objects to be
determined by the members at or before the time of dissolution,
or in default thereof by the Prime Minister of the East Punjab and H
276 SUPREME COURT REPORTS (1997) SUPP. 1 S.C.R.

A if this could not be done, then, to some charitable object and hence
the amount was not to go back to the members. The Tribunal,
however, held that the income of the assessee was not taxable. On
a reference :

Held, that the contributors by incorporating clause 7 did not
B deprive themselves of the control on the disposal of the surplus.
Ultimately, they could agree to divide the surplus among themsel-
ves or to contribute the amount to a similar association or to a
charitable trust. The assessee was a mutual benefit association and
its income was not taxable."
c The said judgment was followed subsequently in all matters arising under
Sections 256(1) and 256(2) of the Act. So, for the assessment years which
are subject matter of cases falling under Group-D stated herein above, the
above decision reported in 180 ITR 160 was followed and the income
received by the assessee under the head "Others" - admission fees, read-
D mission fee, periodical subscription from the members, etc. were held to
be exempt or non-taxable on the principle of mutuality.

13. The above four sets of cases falling in Groups A to D shall alone
be covered by this Judgment. With regard to 7 cases/appeals falling in
E Group-E, the Assessee is Cawnpore Club Ltd. It is seen that the income
that was sought to be assessed in the case of assessee, was one derived
from property let out and also interest received from F.D.R., N.S.C. etc.
In these cases, the Court held that income should be assessed as one from
"other sources" and not income from property. It does not appear that the
larger plea that the income is totally exempt on the principle of mutuality, was
F decided in favour of the assessee. In the appeals filed by the Revenue, the
only question that may probably arise is, whether income received from the
property let out and interest by way of F.D.R's, N.S.C. etc. can be brought
to tax under the head "income from property''. Since the issue raised in this
batch of seven cases is not similar to or same as the one involved in the
G other cases coming under Groups A to D, we do not propose to deal either
with the facts or the decisions rendered by the authorities in this batch of
cases (Group-E). All that we propose to do is to delink the cases coming
under Group-E and direct them to be posted separately for hearing and
disposal before an appropriate Bench.

H 14. Now we turn to the main question canvassed by the Revenue in
C.I.T., BIHAR v. BANKIPUR CLUB LID. [PARIPOORNAN, J.) 277

the appeals coming under Groups A to D, namely, whether the assessees A
- mutual clubs, are entitled to exemption for the receipts or surplus arising
from the sales of drinks, refreshments etc. or amounts received by way of
rent for letting out the buildings or amounts received by way of admission
fees, periodical subscriptions and receipts of similar nature, from its mem-
bers? In all these cases, the appellate tribunal as also the High Court have B
found that the amounts received by the clubs were for supply of drinks,
refreshments or other goods as also the letting out of building for rent or
the amounts received by way of admission fees, periodical subscription etc.
from th.e members of the clubs were only for/towards charges for the
, privileges, conveniences and amenities provided to the members, which
they were entitled to as per the rules and regulations of the respective C
Clubs. It has also been found that different clubs realised various sums on
the above counts only to afford to its members the usual privileges, ad-
vantages conveniences and accommodation. In other words, the services
offered on the above counts were not done, with any profit motive, and
were not tainted with commerciality. The facilities were offered only as a D
matter of convenience for the use of the members. (and their friends, if
any, availing of the facilities occasionally).

...... In the light of the above findings, it necessarily follows that the
receipts for various facilities extended by the clubs to its members, as stated
herein above, as part of the usual privileges, advantages and conveniences, E
attached to the membership of the club, cannot be said to be "a trading
activity." The surplus - excess of receipts over the expenditure - as a result
of mutual arrangement, cannot be said to be "income" for the purpose of
the Act.
F
15. Our attention was invited to a few decisions which have dealt with
the subject matter in i%ue herein. The gist of the various English decisions
has been succinctly summarised in the textbooks which we have adverted
to herein above (Halsbury's Laws of England, Simon's Taxes, Wheatcroft
etc.). Particular stress was laid on the decisions of the Supreme Court in G
Commissioner of Income-tax, Bombay City v.The Royal Western India Turf
Club Limited, 24 ITR 551; Commissioner of Income-tax. Madras v. Kum-
bakonam Mutual Benefit Fund Ltd., 53 ITR 241, Fletcher (on his own behalf
and on behalf of Tmstees and Committee of Doctor's Cave Bathing Club v.
Income Tax Commissioner, (1971] 3 All ER (PC) 1185. We do not think it
necessary to deal at length with the above decisions except to state the H
278 SUPREME COURT REPORTS [1997] SUPP.! S.C.R.

A principle discernible from them. We understand these decisions to lay
down the broad proposition - that, if the object of the assessee company
claiming to be a "mutual concern" or "club", is to carry on a particular
business and money is realised both from the members and from non-mem-
bers, for the same consideration by giving the same or similar facilities to
all alike in respect of the one and the same business carried on by it, the
B dealings as a whole disclose the same profit earning motive and are alike
tainted with commerciality. In other words, the activity carried on by the
assessee in such cases, claiming to be a "mutual concern" cir Members' club"
is a trade or an adventure in the nature of trade and the transactions
entered into with the members or non-members alike is a trade/busi- ...
C ness/transaction and the resultant surplus is certainly profit - income liable
to tax. We should also state, that "at what point, does the relationship of
mutuality end and that of trading begin" is a difficult and vexed question.
A host of factors .may have to be considered to arrive at a conclusion.
"Whether or not the persons dealing with each other, is a "mutual club" or
D carrying on a trading activity or an adventure in the nature of trade" is
largely a question of fact [Wilcock's case - 9 Tax Cases 111, (132) C.A.
(1925) (1) KB 30 at 44 and 45].

E
16. In the result, we hold that the judgments and orders passed by
the High Courts covered by Groups A,B,C and D, as stated above, do not
merit any interference. The reasoning and conclusion of the High Courts
-
in the judgments and orders impugned are in accord with the settled legal
principles as laid down by Courts. The 16 appeals covered by Groups A
to D filed by the Revenue are, therefore, dismissed with costs, including
advocates' fees which we estimate at Rs. 5000 in each appeal.

F v.s.s. Appeals dismissed.

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