1969-VIL-222-DEL-DT

Equivalent Citation: [1970] 75 ITR 111

DELHI HIGH COURT

Date: 25.02.1969

COMMISSIONER OF INCOME-TAX, DELHI AND RAJASTHAN

Vs

DELHI RACE CLUB (1940) LIMITED.

BENCH

Judge(s)  : S. K. KAPUR., P. N. KHANNA.

JUDGMENT

KHANNA J.-The Delhi Race Club (1940) Limited (hereinafter referred to as the " assessee ") is an incorporated body and members' club. The objects for which the assessee-company was incorporated are, inter alia :

(a) To carry on the business of a race course company in all its branches.

(b) To take over the assets, effects and liabilities of the unincorporated club known as the Delhi Gymkhana Race Club.

(c) To provide courses and grounds in Delhi or elsewhere and to lay out, prepare and maintain the same for purposes of the club and to provide, construct, alter, keep in repair or demolish stands, totalisators, stables for horses, servants' quarters, club houses, pavilions, lavatories, kitchens, refreshment rooms, workshops, sheds, garages and other conveniences in connection therewith and to furnish and maintain the same and to permit the property of the club to be used by members and other persons either gratuitously or on payment.

(d) To promote or hold either alone or jointly with any association, club or persons, meetings, competitions and matches relating to racing and other sports and pastimes, and to offer, give or contribute prizes, medals and awards and to promote, give or support dinners, balls, concerts and other entertainments.

The liability of the members is limited. By clause 5 of the memorandum of association, every member of the club has undertaken to contribute to the assets of the club in the event of the same being wound up during the time that he is a member or within one year afterwards, for payment of the debts and liabilities of the club contracted before the time at which he ceases to be a member, and the costs, charges and expenses of winding up the same, and for the adjustment of the rights of the contributories amongst themselves, such amounts as may be required, not exceeding one hundred rupees. According to clause 6, if upon the winding up of the club or its dissolution, there remains after the satisfaction of all debts and liabilities any property whatsoever, the same shall be paid or distributed amongst the members of the club in equal shares. " Regular members " of the assessee-club are required to pay an entrance fee and annual subscription, while " life members " pay a life membership subscription. The life members are not required to pay any further subscriptions for the rest of their lives. Each of the above members has a vote on every motion before the assessee-club in general meetings. There are " stand members " also who do not pay any entrance fee, but pay regular periodical subscriptions. " Honorary members " are under no obligation to pay entrance fee or any subscription, but are entitled to all the rights and privileges of a regular member.

The assessment year with respect to which the present proceedings have arisen is 1953-54, the relevant previous year ending on April 30, 1952. The assessee-club encourages horse races. The profit and loss account showed that the incomes were mainly from totes, gate-income and book-makers fees which totalled Rs. 6,72,969 out of the total gross receipt of Rs. 8,31,062. The items now in dispute are the members' subscriptions consisting of Rs. 3,500 on account of membership subscription and Rs. 7,500 on account of life-membership subscriptions, totalling Rs. 11,000.

The assessee-company claimed exemption in regard to this item before the Income-tax Officer who, in the assessment order, stated thus :

" ........ It is admitted that members are allowed free admission to the club and participants have to pay for the races. The members pay it in lump sum. As such this amount is not of the type which is usually paid to mutual benefit societies. The claim is, therefore, not admitted. "

The Income tax Officer, thus, equating the membership subscription with the gate-money received from the non-members, included the aforesaid sum in the total income. On appeal, the Appellate Assistant Commissioner held against the revenue and the Income-tax Appellate Tribunal concurred with him. The Tribunal summarised their findings of fact and conclusions thus :

" (i) Delhi Race Club (1940) Ltd. is essentially a members' club, though incorporated.

(ii) It is not a trade or professional association envisaged in section 10(6).

(iii) One of the purposes for the formation of the club, inter alia, was to provide for the excitement of thrill provided by the horse racing.

(iv) The club, like the Delhi Gymkhana Club (situate close by), offered amenities and facilities offered by a members' club, though this was a minor aspect.

(v) The activities connected with and ancillary to horse racing has been held to be business activity and the assessee agrees to this finding.

(vi) The club is mixed in its activities : some aspects, e.g., horse racing, are tainted with commerciality. Other aspects are not so tainted and could be said to be in the nature of facilities provided by fashionable sports club.

(a) In some activities the club acts like a mutual body, for the monthly subscriptions it receives from the members, it provides certain club facilities to the members.

(b) The other activities, however, are concerned with public. For fees, gate-moneys, etc., it has intercourse with the public and earns incomes which could be described as business income.

(vii) The subscriptions now in dispute arise entirely from its members, entirely for a common cause and for mutual benefit. Even if the racing was stopped or suspended, members would have contributed the same subscription according to the club rules. The receipts were spent for the common benefit."

On the above facts, the Tribunal, applying the doctrine of mutuality as propounded in the case of Carlisle Golf Club v. Smith, where it was held that in a members' club, the subscriptions by the members are not taxable, held that the receipts in paragraph (vii) above are immune from taxation. It was held that the activities of the assessee were mixed ; although essentially a members' club offering club facilities to the members, it also carried on the business of horse racing. While the income from the said business was held to be taxable, the members' fees (subscriptions) realised for offering the club facilities, were immune from taxation because such receipts fell within the test of mutuality. The observations of Lord Macmillan in the case of Municipal Mutual Insurance Ltd. v. Hills were relied upon.

At the instance of the Commissioner of Income-tax, the Tribunal opined that a question of law does arise out of the order and, on the facts aforesaid, they referred for the opinion of this court the following question :

" Whether, on the facts and in the circumstances of the case, the sum of Rs. 11,000 received by the assessee as subscription from its members is not taxable ? "

When this reference came up before a Bench of this court, my Lord, the Chief Justice, and Tatachari J. asked for a supplementary statement from the Tribunal, stating if there was material on record as to what further or additional amenities are provided to the members of the club over and above those which the non-members get when they visit the race course as such visitors.

The Tribunal, then, in a supplementary statement referred to some clauses of the memorandum of association of the assessee-club which have been mentioned above. The Tribunal also stated to have taken note of certain special amenities in the form of bar and entertainment which were available to the members. Paragraph 7(b) of the Tribunal's order was reproduced in the supplementary statement to show that it contained the material on record, on the basis of which the Appellate Tribunal had arrived at the finding that the club provided additional facilities to its members which were not available to the non-members.

The further facts, as found by the Tribunal, can be summarised as follows :

(a) Subscriptions were received from the members.

(b) Unlike a stock exchange or grain exchange, the character of the club is not that of a trade or professional club, even though its activities can be held to be business activities.

(c) It is essentially a bona fide club of ordinary character formed for the purpose of recreation and purposes incidental thereto. It is essentially an association of sports-loving gentlemen and the main purpose is to provide the excitement of the sport of horse-racing to the members.

(d) It also provides entertainment and excitement to the public and outsiders and charges fees therefore, which constitutes business.

(e) The club exists for the members and not for business. It was formed and is maintained to provide the members a suitable race course for the purpose of their recreation ; and the essential character of the club remains. The visitors' part is ancillary.

The learned counsel for the revenue has urged that the subscriptions received by the assessee are in the nature of payments for specifie services and, therefore, they are taxable. The main reliance of the learned counsel for the revenue was upon the case of Commissioner of Income-tax v. Royal Western India Tarf Club Ltd. and it was urged that, as held in the said case the assessee was not a mutual association. The learned counsel submitted that the facts of the case before the Supreme Court (Royal Western India Turf Club Ltd. case) and the facts of the present case are similar, inasmuch as both allow to members the same or similar amenities as they give to non-members, i.e., the use of a seat in a stand, the facility to watch races and to bet on horses in the races and the use of totalisator in the stand. The charges for admission in the stand are similar from members and non-members alike in the case of Western India Turf Club while, in the present case, the assessee makes no separate charge for such admission, but the members pay it in lump sum under the name of subscriptions. Hence, there is, in reality, no difference between the two, submits the learned counsel. He, therefore, urges that the principles laid down in that case by the Supreme Court are applicable here and the subscription should be held to be taxable income. He has also cited in his support the cases of Commissioner of Income-tax v. Calcutta Stock Exchange Association Ltd., Delhi Stock Exchange Association Ltd. v. Commissioner of Income-tax and Royal Calcutta Turf Club v. Secretary of State.

The learned counsel for the assessee, on the other hand, has urged that section 10(6) of the Income-tax Act is not applicable to the present case, and further contends that the principles underlying the assessment of the income of mutual concerns are that the surplus arising from mutual transactions is not assessable where there is complete identity between the contributors and participators, or where the ownership of the surplus is restricted to those who provided it as a class. The surplus arising to the assessee on subscriptions from members in this case shows a complete identity between the contributors and the participators. He, therefore, urged that the members' subscriptions receined by the assessee were not taxable income. Commissioner of Inland Revenue v. Eccentric Club Ltd, was cited. He also refers to Commissioners of Income-tax v. Royal Western India Turf Club Ltd., and urges that the said decision gives no support to the contentions of the revenue.

The authorities referred to above as also other authorities especially those as are discussed in the case of Royal Western India Turf Club are agreed that the essential requirement is that all the contridutors to the common fund must be entitled to participate in the surplus and that all the participators of the surplus must be contributors to the common fund in other words, there must be a complete identity between the contributors and the participators. It is also clear that it makes little difference if the persons who are so associated together are incorporated. The incorporation is a convenient instrument for enabling the members to conduct a social club. The surplus arising from an ordinary mutual activity would not lead to a resultant profit, because each member pays what would be required for the common benefit. If his contributions prove to be insufficient, he makes good the deficiency; if, on the other hand, it is found that it exceeds what is ultimately required, the excess is returned. Such excess, from no point of view, can be regarded as profit or gain. It has been further held that a mutual association may carry on trade if its operations are confined to its own members. If commercial elements exist, the mere fact that the customers are the persons who form the association or body, would not deprive the transaction of its character of trading. But providing privileges to the members as members cannot be said to arise out any profit motive especially when it is provided gratuitously.

The learned counsel for the revenue has 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 sub-section. Trade association is not the same thing as a trading association. A trade association may be an association of tradesman to protect their common interest. The assessee, 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. The facts in the case of Royal Calcutta Turf Club, decided by the Calcutta High Court, were also quite different. The receipts from non-members were being considered in that case, which is not in issue in the present case.

In the case of Commissioner of Income-tax v. Royal Western India Turf Club Ltd., the Supreme Court, on page 565 of the report, observes as follows:

"As already stated, in the instant case, there is no mutual dealing between the members inter se and no putting up of a common fund for discharging the common obligation is to each other undertaken by the contributors for their mutual benefit. On the contrary, we have here an incorporated company authorised to carry on an ordinary business of a race course company and that of licensed victuallers and refreshment purveyors and in fact carrying on such a business. There is no dispute that the dealings of the company with non-members take place in the ordinary course of business carried on with a view to earning profits as in any other commercial concern. It is further admitted that some of the dealings of the company with its members take place in the ordinary course of business and the profits arising out of those dealings, e.g., the fourth item of receipt of Rs. 82,490, are taxable. The company gives to its members the same or similar amenities as it gives to non-members, namely, the use of an unreserved seat in a stand, the facility to watch the races and to bet on the horses in the races, use of the totalisator in that stand and the facility for refreshment. In fact the daily ticket fee for admission into the members' enclosure is exactly the same as that for admission into the first enclosure to which the public have access. The only difference is that a separate enclosure with a separate totalisator is provided for the members where they can meet their fellow members and not be disturbed by the intrusion of non-members. This privilege is referable to their membership of the company for which they pay an entrance fee on their election as members and for which they pay the periodical subscriptions both of which are not sought to be brought to charge. The rest of the facilities mentioned above which the members get are in substance the same as those enjoyed by the public. Those facilities are given to members and non-members alike for a price. The character of the charges made on members is precisely the same as or is similar to that of the charges made on non-members, for the company receives moneys from both members and non-members in return for the same or similar facilities given to both in the course of one and the same business. The dealings in both cases disclose the same profit-earning motive and are alike tainted with commerciality."

In the said case before the Supreme Court, it was recognised that there can be certain privileges which are referable to the members' membership of the club, for which they pay an entrance fee on their election as members and periodical subscription, both of which in that case were not sought to be brought to charge. What the Supreme Court held was liable to tax, was the receipts in respect of dealings which disclosed the profit-earning motive and which were tainted with commerciality. In the said case' apart from the entrance fees and periodical subscriptions, the members paid admission ticket fees for entrance in the stands, just as the non-members paid. These being tainted with commerciality were held to be taxable. The members' entitlement to certain special privileges, which were not available to non-members, was clearly recognised. A difference between the members and non-members was noticed, inasmuch as a separate enclosure with a separate totalisator was provided for the members, where they could meet their fellow members and not be disturbed by the intrusion of non-members. This difference according to the Supreme Court, was a privilege which was referable to their membership of the company for which they paid an entrance fee and periodical subscriptions.

In the present case before us, the subcriptions paid to the asseesee by its members are paid in order to enjoy the membership of the assessee, entirely for a common cause and mutual benefit. Even if the racing was stopped or suspended, members would have contributed the same subscription according to the articles of association of the assessee-company. The receipts as found by the Appellate Tribunal are spent for the common benefit. The club like the Delhi Gymkhana Club offered amenities and facilities offered by a members' club. The payment of subscriptions entitles its members to the right of vote and to participate in the management of the affairs of the assessee-company apart from the right to enjoy other facilities. Upto this point, at any rate, it is clear that the assessee has not carried on trade or business or other activity which can be said to be tainted with commerciality. The further right of the members to admission in the enclosures to view and participate in the races when they are run, without any payment or charge, does not bring about a change, for this, amounts to an extra privilege, which is enjoyed by the members as members. The free admission in the enclosures, for which non-members have to pay, represents the difference in this case between the members and non-members. In the case of members, it is a privilege referable to their membership of the assessee, without there being a profit earning motive, while in the case of non-members, the charges recovered for the same facility, result from a profit making motive. There is neither any basis nor justification for changing the character of the subscription paid for acquiring and maintaining membership and turning it into something equivalent to admission fee for participation in the races paid by non-members. Free admission in the enclosures enjoyed by the members is nothing more than a mere privilege flowing in by virtue of their being members.

The privilege in the case of the Royal Western India Turf Club was limited to admission into a separate enclosure where they were not disturbed by the intrusion of non-members. They, like the non-members, however, paid an admission fee in that case. The privilege in the present case is extended further to similar admission in the enclosures for viewing and participating in the races, being free. This extra facility in the present case is incidental to membership and is, therefore, completely immune from every taint of commerciality. The character of the subscription paid by the members in this case cannot be said to undergo a change merely because the facilities or the privileges enjoyed by the members of the assessee are more than the facilities and privileges enjoyed by the members of the Royal Western India Turf Club. These facilities and privileges may be more or less in a given case. The test is whether they are referable to the contributions by members as such and are immune from the taint of commerciality. The entrance fees and periodical subscriptions paid by the members for obtaining membership of the assessee-club in the present case and which remain payable even if the racing is stopped or suspended, cannot be said to be received by the assessee out of any profit motive ; and they remain immune from the taint of commerciality even when the members are allowed the privilege of a free admission into stands, where non-members would be required to pay, the said members' privileges being clearly referable to their membership of the club. The receipts from members' subscriptions or entrance fees by the assessee cannot, therefore, form part of its assessable income; and the sum of Rs. 11,000 received by the assessee as subscription from its members is not taxable.

The answer to the question referred to us, therefore, is in the affirmative. In the circumstances, the revenue shall pay the costs of the respondent. Counsel's fee Rs. 100.

KAPUR J.-I agree.

 

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