Kanwal Krishan, Accountant Member - (1.) THERE are two appeals filed in this case by the department for the years 1977-78 and 1978-79 with corresponding cross-objections by the assessee and two appeals filed by the assessee against the orders of the Commissioner under Section 263 of the Income-tax Act, 1961 ('the Act') for the years 1979-80 and 1980-81. Since common points are involved in the appeals and the cross-objections, they are taken up together and will, be disposed of, for the sake of convenience, by this common order.
(2.) We would, at the outset, deal with an additional ground of appeal sought to be raised by the learned departmental representative in the appeals filed against the order of the Commissioner (Appeals) for the first two years, which is in these terms: Without prejudice to the grounds raised earlier, the Commissioner (Appeals) erred in holding that the income of the assessee is not chargeable on the grounds of mutuality when in assessee's case there is no complete identity between contributors to the fund and recipients of the fund. We find that in the very first ground of appeal raised for the two years, the department raises the contention that the Commissioner (Appeals) erred in holding that the principle of mutuality was applicable in the assessee's case. The additional ground sought to be raised on behalf of the department in merely a repetition of the contention raised in the memo of appeal and it is not, therefore, any additional ground. For these reasons, therefore, the additional ground is rejected as infructuous. The dispute between the department and the assessee centres around the question whether the assessee is entitled to its claim for exemption on the principle of mutuality. For all the four years under consideration, the assessee declared in its returns income from only one source and that is, the interest earned on its deposits with banks. The ITO held that the assessee was also liable to be assessed under the head 'Income from house property' on the bonafide annual value of its properties consisting of cottage suites rented out to members and their guests. Against these assessments for the years 1977-78 and 1978-79, the assessee appealed to the Commissioner (Appeals) who by her consolidated order for the two years held, following the ruling of the Madras High Court in the case of Presidency Club Ltd. v. CIT [1981] 127 ITR 264, that the assessee's income from renting out the aforesaid properties was saved on the principle of mutuality. The department is in appeal against the Commissioner (Appeals)'s orders for the two years and the assessee has filed cross-objections thereto. For the other two years, the Commissioner took revision proceedings under Section 263 against the assessment orders holding that for the reasons stated in his order, which is also consolidated for the two years, the principle of mutuality did not apply in the assessee's case; on that finding he set aside the assessment orders directing the ITO to make fresh assessments on the basis that the principle of mutuality was not applicable. The assessee is in appeal before us against this order of the Commissioner.
(3.) BEFORE proceeding to examine on the facts of the case whether the principle of mutuality is applicable, it would be well for us to keep in view the enunciation of the principle as made by judicial authority. We could not do better for this purpose than to quote with respect the enunciation of this principle as made by the Madras High Court in the case of CIT v. Madras Race Club [1976] 105 ITR 433 et seq. where the question arose whether the subscriptions collected by the Madras Race Club from its members were exempt from tax on the principle of mutuality. This is what their Lordships held: in considering the case for exemption of the subscriptions collected from the members of the application on the principle of mutuality it is necessary to bear in mind two concepts. The first concept is that the principle of mutuality is based on the doctrine that no person can make a profit out of himself. To take a common instance, supposing a dozen persons gather together and agree to purchase certain commodities in bulk and distribute them among themselves in accordance with their individual requirements, they may collect a certain amount provisionally based on the anticipated price of the commodities to be purchased. If it ultimately happens that the commodities are available at a cheaper price so that at the end of the distribution of the commodities among themselves, a part of the original amount provisionally collected is repaid, then what is repaid cannot by any test be classified as income. This would represent savings and not income. The Income-tax Act seeks to tax income and not savings ... (p. 443) Then further: The second aspect relates to cases of absence of a trade or business which produced profits. For instance, a members' club is intended to promote social intercourse among the members. It does not purchase or sell commodities. It is merely a convenient instrument for the purpose of providing facilities for the members. There is no element of profit or concept of trade in such a club. Unless the statute itself intervenes and says that the transaction between the club and the members shall be treated as a sale as has been done by the Tamil Nadu General Sales Tax Act, there will be no question of any trading between the club and its members. Any surplus realised from the members would not have the character of income liable to be taxed. (p. 444);