Decided on September 22,1971



Sriramulu, J. - (1.) THIS reference arises under the Indian Income-tax Act, 1922. At the instance of the Commissioner of Income-tax, Andhra Pradesh, the Income-tax Appellate Tribunal, Hyderabad Bench, has referred the following question for the opinion of this court : "Whether, on the facts and circumstances of the case, the assessee-club is entitled to exemption from income-tax in respect of its income for the assessment year 1961-62 ? "
(2.) THE material facts leading to the reference may be stated. THE assessee is the Merchant Navy Club, Visakhapatnam. By subscribing their names to a memorandum of association filed with the Registrar of Joint Stock Companies under the Societies Registration Act, 1860, some persons formed themselves into a society and got it registered under Section 3 of the Societies Registration Act; One of the objects of the assessee-club was to provide recreation for the officers and ratings of vessels of the merchant navies of the world. Three classes of members are contemplated under the constitution of the club. THEy are : (1) sea going officers and ratings of all vessels of the merchant navies visiting Visakhapatnam; this class of members do not pay any subscriptions; (2) executive members of the staff of the steamship agencies carrying on business in Visakhapatnam and members of the gazetted marine staff of Visakhapatnam Port, and marine surveyors at Visakhapatnam 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 Visakhapatnam, who in the opinion of the committee justify their being accepted as members and likewise such officers of the Indian Navy as shall on application be approved by the committee; this class of members pay no subscription at all and shall have no voting rights. THE committee has also power to invite the companies of visiting warships of any nationality to be special honorary members. This class of members also do not pay any subscription. In pursuance of one of its objects to provide recreation for the officers and ratings of vessels, the club provided certain amenities like restaurant and bar, etc. Those amenities were provided to the members only on payment of their cost plus some extra amount. The extra amount so realised was utilised by the club for the maintenance and improvement of the club. Those amenities were provided to both the paying and non-paying members but only on payment. The amenities were provided only to the members of the club and not to outsiders. For the assessment year 1961-62 after meeting all the expenditure, the club realised a surplus of Rs. 35,301. Before the Income-tax Officer the assessee contended that, (i) under the Sales Tax Act, the Sales Tax Appellate Tribunal had decided that the assessee club was not a dealer and the surplus realised by it was not its profit; (ii) the club is a mutual benefit society and hence the surplus realised by it was not liable to income-tax under the Income-tax Act.
(3.) THE Income-tax Officer found that the subscribing members were not entitled to the facilities, the sales and service rendered were purely for profit, these profits were utilised for improvement of the club and for developing other facilities, the customers to the club who contributed nothing to the same were entitled to participate in the surplus and there was no element of a social club present because even the games were charged. THE Income-tax Officer was also of the view that the definition of the word "dealer" under the Sales Tax Act was irrelevant so far as the Income-tax Act was concerned and the trading was between paying members and non-paying members and was not a trading by self with self. In that view the Income-tax Officer held that the surplus was taxable in law and accordingly taxed it. In arriving at the said conclusion, the Income-tax Officer relied upon Section 10(6) of the Income-tax Act and also upon the absence of mutuality between the contributors and the participators. Aggrieved by the order of the Income-tax Officer the assessee filed first appeal to the Appellate Assistant Commissioner. It was contended before the Appellate Assistant Commissioner that the assessee was a mutual benefit society inasmuch as even such members who did not pay any subscription had to pay for the amenities which they enjoyed and, therefore, there was identity as a class between the participators and the contributors. The Appellate Assistant Commissioner accepted the said contention of the assessee and held that the surplus of receipts over expenditure was exempt from payment of tax.;

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