1979-VIL-622-BOM-DT

Equivalent Citation: [1982] 136 ITR 569, 2 TAXMANN 57

BOMBAY HIGH COURT

Date: 31.01.1979

COMMISSIONER OF INCOME-TAX, BOMBAY CITY II

Vs

MALABAR HILL CLUB (FORMERLY WIAA CLUB)

BENCH

Judge(s)  : DESAI., M. N. CHANDURKAR

JUDGMENT

The judgment of the court was delivered by

CHANDURKAR J.-In this reference, which is made at the instance of the revenue, the assessee is a club which was incorporated under the Indian Companies Act on 10th September, 1947. It is not now in dispute, and indeed it has been so stated in the statement of the case, that the assessee club has been held to be a trading company. This was held in appeal before the Tribunal arising out of the assessment for the assessment years 1955-56 to 1959-60. The assessment years in question are assessment years 1963-64 and 1964-65. The categories of members of the assessee-club are: (1) honorary members, (2) life members, (3) ordinary members, (4) temporary members, (5) service members, and (6) associate members.. Under the articles of association of the club entrance fees are payable by life members and ordinary members of such respective amount as may from time to time be determined by the executive committee. During the assessment years in question the entrance fees for life members, was Rs. 2,500 and the entrance fee for ordinary members, was Rs. 500. An ordinary member can become a life member on payment of fees prescribed for life members after deducting the amount which he has paid by way of entrance fees as an ordinary member. An ordinary member has to pay an annual subscription in advance on election and on, the 1st day of April in each year thereafter. Life members, service members and temporary members are, however, not liable to pay any annual subscription under art. 38. Under the articles, temporary, honorary, service and associate members are subject to the memorandum and articles of association and the rules and bye-laws of the club for the time being in force, but they are not entitled to receive notice of or to attend or to vote at the general meeting of the club or to be elected members of the Executive Committee of the club or of any sub-committee of the club or to stand for election or to hold any office of the club or to participate in the distribution of any assets of the club. Generally, the rights of the life members and the ordinary members, so far as the enjoyment of the facilities provided by the club are concerned, are the same, though there is some difference between their rights in relation to the share in the property of the club in the case of windingup or dissolution of the club. A life member has an equal share in the property of the club irrespective of the period for which he has been a life member, while an ordinary member is eligible for the share in the club property only if he has been a member of not less than five, years' standing. One more distinguishing feature which has been brought to our notice is that a widow of a life member can become a life member of the club at concessional rate of fee of Rs. 500, while the widow of an ordinary member does not get a privilege of becoming a life member at a concessional rate. Under the bye-laws the club provides several facilities and the members are entitled to use the club house and to bring guests with them. There are facilities for accommodation in the club's residential room on daily, weekly or monthly basis available to, all members; sport facilities are also provided for playing tennis, badminton, billiards members can avail of the facility of the card room and the swimming pool. These are some of the facilities provided by the club.

In the assessment proceedings for the assessment year 1963-64, the assessee had received Rs. 10,000 as entrance fees of life members and in the assessment year 1964-65 such entrance fees received by the club amounted to Rs. 27,500. Before the ITO it was the case of the assessee that the entrance fee received from life members should be, treated as the capital receipt. It was so treated by the board resolution of the assessee. The ITO took the view that the amounts received by way of entrance fees from the life Members was a revenue receipt in the hands of the assessee. The ITO split up the entrance fees paid by the life members and, according to him, out of the prescribed amount of Rs. 2,500, in fact Rs. 500 was the entrance fees and Rs. 2,000 was consolidated annual subscription. Thus, the ITO treated the two sums of Rs. 8,000 and Rs. 22,000 as revenue receipts and subjected the same to tax.

This action of the ITO was confirmed by the AAC while disposing of the appeals filed by the assessee. The assessee then filed appeals before the Income-tax Appellate Tribunal. Before the Tribunal it was urged that the assessee had treated the entrance fees received from both ordinary members and life members as being on capital, account and had treated the entire amount as general reserves. It was also argued on behalf of the assessee that the I.T. authorities were not entitled to bifurcate the entrance fees into Rs. 2,000 as life membership fee and Rs. 500 as entrance fee. The Tribunal in its order observed that though the argument advanced on behalf of the revenue that entrance fees paid by the life members constituted a consolidated amount in lieu of recurring annual subscriptions was, possible, the argument could not be accepted on closer scrutiny. The Tribunal, however, took the view that the amenities and facilities provided by the club were not related to the particular payment made by the member because, according to the Tribunal, neither the honorary members nor the temporary and service members had to pay any entrance fees and temporary and service members had to pay only local subscription. The Tribunal introduced a concept of hierarchy of member, ship and, according to the Tribunal, the whole scheme of the articles and the bye-laws was to create a hierarchy of membership and the Tribunal held that each member paid entrance fees according to his place, in the hierarchy or according to his status. Thus, the Tribunal found that the entrance fees had nothing to do with the facilities and amenities provided by the club but had much to do with the status of the particular class of members and the entrance fees paid would, therefore, represent the capital payment and receipt in the hands of the club. . According to the Tribunal, when life members pay the entrance fees, they pay it for getting certain facilities or getting certain status and would, therefore, represent capital payment and it would also represent capital receipt in the hands of the club. The claim of the assessee was, therefore, accepted that Rs. 8,000 and Rs. 22,000 for the two years, respectively, should be treated as capital receipt in the hands of the assessee.

On the facts found by the Tribunal, the following question has been referred to us at the instance of the revenue:

" Whether, on the facts and in the circumstances, the sums of Rs. 8,000 and Rs. 22,000 out of the sums of Rs. 10,000 and Rs. 27,500 received by the assessee-club as life members' entrance fees for the assessment, years 1963-64 and 1964-65, respectively, could be rightly held as capital receipts and not revenue receipts in the hands of the assessee-club ?"

Mr. Joshi, appearing on behalf of the revenue, has contended that the fees paid by a life member represented a consolidated value of a series of periodical or recurring payments which a member would have been required to make if he had become an ordinary member of the club. According to Mr. Joshi, an ordinary member would be required to pay an annual subscription every year and it is this liability which has been compounded by a consolidated payment and that by such, consolidation the nature of the payment does not change. According to the learned counsel, if an annual subscription was the income of the assessee, it would retain its character of income even though the payment is made in a consolidated lump sum. The learned counsel contended that the facilities provided to the life members are the same as those provided to the ordinary members and the only concession which flows from making a lump sum payment is that the life members do not have to pay annual subscription every year.

Mr. Colah appearing on behalf of the assessee initially wanted to contend that the club was erroneously treated as a trading company and that the assessee-club was really an association for mutual advantage of the members of the club and there was, therefore, no question of the club carrying on any trading activity when the facilities were made available by the club, to its own members. It was urged that the name "life member " is itself indicative of a status and, according to Mr. Colah, the I.T. authorities have not disclosed any basis for compounding or computation of the annual payments and there was, therefore, no justification, according to the learned counsel, for splitting up the amount of entrance fees made by a life member. It is urged that such an attempt to split up this consolidated payment of Rs. 2,500 into two figures, namely, Rs. 500 by way of entrance fees and Rs. 2,000 by way of a consolidation of the amount of annual subscription would really amount to rewriting the constitution and the bye-laws of the assessee. Alternatively, it was contended that if at all it was found that it would be permissible to split up the amount paid by way of entrance fees by a life member, then the entrance fees equivalent to the amount of Rs. 500 or such as was the amount of the entrance fees as was fixed by the club in the case of ordinary members at relevant time should be treated as the capital receipt and only the balance could properly be treated as income.

Initially, it must be made clear that it is not possible to entertain in this reference any argument that the assessee should not have been assessed as a trading company and that it should have been assessed as a club which was an association for mutual advantage. The orders of the ITO, the AAC and the Tribunal show that the assessment had proceeded on the footing that the assessee is a trading company. Indeed, the authorities have taken the view that the order of the Tribunal in respect of the earlier years has concluded that matter. No attempt seems to have been made by the club to agitate this question at any earlier stage in the course of the appeal either before the AAC or before the Income-tax Appellate Tribunal. The question as to whether the assessment proceedings of the assessee proceeded, erroneously on the footing that the assessee was trading company would now be completely out of the purview of the question which is referred to us and we are, therefore, unable to entertain any argument intended to urge that the assessee-club was wrongly treated as trading company in the assessment proceedings.

Coming to the main question, in order to arrive, at a proper decision of the question referred to us we are required to consider the real nature of the payment which is made by a life member on account of entrance fees. In order to decide whether the entrance fees paid by a life member should be treated as income in the hands of the assessee or as being in the nature of a capital-receipt, neither the nomenclature used by the assessee nor the manner in which the receipt has been treated by the assessee for the purposes of its accounts would be conclusive. The articles of association of the assessee no doubt provide for different categories of members. Out of these categories of members, we must leave out of consideration the honorary members who are not required to pay any entrance fees or subscription. It is well known that when a body like a club elects an honorary member, that is done by way of honour more to the club than to confer any additional benefit on the member himself. Normally, club wants to be proud of having some prominent and distinguished persons as its members and that is the sole consideration for electing person as an honorary member. Life members, service members and temporary members are not liable to pay any Annual subscription and the liability to pay annual subscription is only on the ordinary members. In addition to the annual subscription, the ordinary members, who are ordinarily resident within the local area, have to pay annually, in advance, local subscription of such amount as may from time to time be determined by the executive committee. The temporary members, service members and associate members form, by the very nature of the incidents of their membership, an independent class of persons who are not entitled to take part in the management of the club though, in other respects, all of them are entitled to enjoy the same privileges as other members. Their membership is entirely of a temporary nature and its duration is controlled by the appropriate articles. They cannot, therefore, be compared with either life members or ordinary members. If a person wants to avail of the facilities afforded by a club and exercise the rights which are available to an ordinary member, he has to pay an entrance fee plus an annual subscription if he wants to become an ordinary member. If a person wants to become a life member, he pays an amount which is styled as entrance fees which comparatively is a much larger amount than the entrance fees paid by ordinary members. The only effect of the life members paying the entrance fees at a larger amount is that they are relieved of their recurring liability to pay the annual subscription year after year. It is obvious that the life members are not required to pay the annual subscription year after, year because they have already paid a large amount which was styled as entrance fees. Now, if we compare the rights and privileges of the life members and the ordinary members, there is hardly any substantial difference between the two, and, as already pointed out, the only substantial difference between the two classes of members is that there is no liability to pay annual subscription in the case of life members. If the rights and privileges which are enjoyed by the life members and the ordinary members are the same and if for the purposes of enjoying these rights and privileges the ordinary member has to pay not only an entrance fee but also an annual subscription, it is obvious that when the articles of association of the assessee-club required the life members to pay a larger amount which was described as entrance fees, it was intended to commute the amount of annual subscription which a member would otherwise be required to pay. The amount which is paid by life members and is styled as entrance fees has, in our view, obviously two elements in it. A part of the amount paid partakes of the nature of entrance fees which is a fee paid to the club with a view to acquire the right to avail of the services and the facilities made available to the club on annual subscription and other rights provided under the articles and the bye-laws. The other part of the amount is a consolidated commuted payment in, lieu of the annual subscription which a member would otherwise be required to pay. It is difficult to imagine that those who founded the club and framed the articles of association could have intended that while ordinary members would be allowed to exercise member's rights and avail of the facilities available in the club on payment of the annual subscription, the same facilities would be available to the life members free of any cost and it appears obvious to us that the entrance fees includes within it a compounded payment in lieu of the annual subscription which a member would have been required to pay as an ordinary member. We have, therefore, no doubt in our mind that in the case of life members when the entrance fee is paid, it is a consolidated amount, part of which must be treated as entrance fees and part of it as a compounded payment in lieu of, the recurring payments to be made annually in the nature of annual subscriptions.

When the amount paid by a life member, which is styled as entrance, fee, is so split, it will not be correct to say that this would result in rewriting the constitution or articles of association of the assessee. As already pointed out, the real question which has to be determined, is the nature of the receipt in the hands of the assessee and if a discussion of the nature of the receipt is not foreclosed by any nomenclature adopted by the assessee, it would be perfectly open to the I.T. authorities to scrutinise the nature of the receipt and to classify it as either capital receipt or a revenue receipt or partly of one kind and partly of another.

Mr. Colah has relied on-certain decisions which deal with the payments in the nature of a salami or a premium because his contention was that the entire amount of entrance fees paid by the life members must be treated like a salami. The decisions relied upon by Mr. Colah are: (1) CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC), (2) Durga Das Khanna v.. CIT [1969] 72 ITR 796 (SC), (3) Maharaja Chintamani Saran Nath Sah Deo v. CIT [1971] 82 ITR 464 (SC) and (4) CIT v. Ratilal Tarachand Mehta [1977] 110 ITR 71 (Bom). All these cases deal with the question of determining whether an amount is a salami or a premium. The test of a salami or premium, as laid down in the Panbari Tool Co.'s case [1965] 57 ITR 422 (SC), was whether the amount paid in a lump sum or in instalments is the consideration paid by the tenant for being let into possession. It was pointed out that where the interest of the lessor is parted with for a price, the price paid is salami or premium. In Durga Das Khanna's case [1969] 72 ITR 796 (SC), the Supreme Court took the view that, prima facie, premium or salami is not income and it is for the I.T. authorities to show that facts exist which would make it a revenue payment. The test laid down in Panbari Tea Co.'s case [1965] 57 ITR 422 (SC), was reiterated in Maharaja Chintamani Saran Nath Sah Deo's case (1971] 82 ITR 464 (SC). and it was held that salami is a single payment made for the acquisition of the right of the lessor by the lessee to enjoy the benefits granted to him by the lessee. It was observed that that general right may properly be regarded as a capital asset and the money paid to purchase it may properly be held to be on capital account and merely because a certain amount paid to the lessor is termed as salami, it did not follow that no enquiry can be made to determine whether it has or has not an element of revenue receipt in the shape of advance payment of royalty or rent. It was pointed out in that case that the onus is upon the I.T. authorities to show that there existed facts or circumstances which would make payment of what has been called salami income. In Ratilal Tarachand Mehta [1977] 110 ITR 71, it was held that even though every payment by way of salami or premium need not necessarily be of a capital nature or on capital account, yet since, prima facie, that is the nature of such payment, it is for the department to establish facts which would go to show that such payment was in the nature of income and not on capital account. Relying on these authorities it was vehemently contended by Mr. Colah that the amount of entrance fees paid by a life member must be treated on the same footing as salami.

Now, there can be no doubt that the ratio of none of these decisions is directly applicable to the instant case so far as the question of determining as to whether the receipt of the entrance fees from life members should be treated as a capital receipt in the hands of the assessee, is concerned. Payment of a premium, or salami as it is often called, is a concept peculiar to a transfer of leasehold right in respect of immovable property. It is single payment made by the lessee for an acquisition of the right to enjoy the benefits granted by the lease. That concept, therefore, cannot in terms be imported in a matter like the present one where we have to consider the nature of the payment and the nature of the receipt in the hands of the assessee in the context of the rights and benefits available to a member of a club the functioning of which is regulated by its articles of association and the bye-laws. As we have already pointed out earlier, since the entrance fees partake partly of the nature of entrance fees and partly of the nature of a Compounded payment of the annual subscriptions, it will not be possible to treat the entire amount as a capital receipt in the hands of the assessee.

The argument that there is no apparent connection between the compounded payment and the length of the period for which a life member would avail of the facilities of the club and would have been required to pay the annual subscription and, therefore, there was no justification for splitting up the amount of entrance fee does not, in our view, affect the conclusion which we have reached. It cannot be disputed that in a given case a person may continue to be a life member for a long time and if he had become an ordinary member and paid annual subscription, the club would have received a much larger amount by way of annual subscription than what was received by the club by way of a consolidated payment. Such uncertainties are, however, inherent in the nature of the fee that is fixed in such a case. The possible length of the period during which a life member would take advantage of the facilities of the club can never be predicted with any certainty. Finalisation of such fees is found to have an element of arbitrariness in their determination. What amount should be fixed by way of entrance fees for life members was a matter squarely within the discretion of the assessee just as, in a given case, a person might take advantage of the facilities of the club for a long period it may also be that, in a given case, a life member may cease to take advantage of the facilities of the club only after a very brief period. The crucial question is whether it was intended that the services which had to be availed of by ordinary members on the payment of an annual subscription could be availed of by life members without any charge or was such charge intended to be recovered in a lump sum at the beginning itself. We are thus mainly concerned with the character of the payment and if the character is such that a part of it is in lieu of recurring annual payments, then the possible advantage or disadvantage either to the member or to the club would not affect the nature of the payment.

That brings us to the second aspect of the case argued by Mr. Joshi for the revenue. Once a part of the entrance fees paid by a life member is held to be a compounded payment for annual subscriptions, there is no difficulty in holding that that part of it would be income in the hands of the assessee. So far as the remaining amount is concerned, it would be in the nature of a capital receipt of the assessee. What is, however, argued by Mr. Joshi on behalf of the revenue is that even that part of the consolidated amount of entrance fees which could be classified as entrance fees should be treated as income. We must first decide what part of the entrance fees paid by a life member should be treated as a capital receipt.

Now, so far as the year in question is concerned, the entrance fees for an ordinary member prevalent was Rs. 500. It would, therefore, be reasonable, while dissecting the consolidated entrance fees of Rs. 2,500 into entrance fee as such and a commuted payment on account of annual subscription, to treat Rs. 500 out of Rs. 2,500 as entrance fees and the rest of it is in the nature of a consolidated payment by way of annual subscriptions and, therefore, as income. With regard to this entrance fee of Rs. 500 it is contended that this must also be treated as income in the hands of the assessee and our attention has been invited to a passage from Halsbury's Laws of England, 3rd Edn., Vol. 20, para. 8, under Pt. 1, Sec. 1, at p. 13. It reads as follows:

"Factors considered in determining quality of receipt. In the decided cases the courts have had regard to various factors in determining whether the proper nature of an item of receipt is income. If an item recurs or is likely to recur annually or repeatedly to form a series, that is an indication of its quality of income."

Mr. Joshi contended that entrance fee is in the nature of a recurring receipt in the hands of the assessee and since entrance fee is received, from time to time, the test laid down above is satisfied.

Now, it is important to bear in mind that though entrance fee is received by the assessee from time to time it is received from different persons and it is not one of those payments which are made by the same person by virtue of any recurring liability. Entrance fee is paid by a member only once and it is this payment which has to be considered whether it is in the nature of income or a capital receipt. If we look at the articles of association of the assessee-club, It is clear that in order to avail of the rights of a member and the facilities and the services provided by the assessee-club, it is not enough for a person merely to pay the annual subscription, As a matter of fact a person cannot exercise the rights and privileges of a member merely by volunteering to pay the annual subscription. What a member has to acquire first is the right of membership of the club. A person has first to get elected as a life or ordinary member, as the case may be, in the manner provided in the articles of association. It is only after a person is elected that he is required to pay the subscription and entrance fee within fourteen days of notice of his election under art. 31. The acquisition of right as an ordinary member is done by the payment of the entrance fee of Rs. 500 in the relevant assessment years. In lieu of this payment of the entrance fee, a member does not get any return in the form of any services or amenities. All that he gets is a right to avail of the amenities or facilities provided by the club on a payment of the annual subscription. This right can be exercised by him as long as the membership is not determined as provided by art. 44. This receipt of Rs. 500 received by the club is return for vesting a right of membership in the member and, therefore, in our view, the entrance fee would clearly be in the nature of a capital receipt in the hands of the assessee.

Mr. Joshi has heavily relied on the decision in Liverpool Corn Trade Association Ltd. v. Monks [1926] 10 TC 442 (KB).. The question there was whether the Liverpool Corn Trade Association Ltd. was a mutual association or was a trading company. The association, which was a limited company under the Companies Act, was formed for the purpose of protecting the interests of the corn trade and for providing a clearing house, market an exchange and arbitration and other facilities for the persons engaged in that trade. Membership of the association was confined to persons engaged in the corn trade as principals. Each member had to acquire one share (of pound 150 nominal value) in the company and had to pay an entrance fee and an annual subscription. Non-members could also become subscribers. Payments were made to the association by members and others for services rendered through the clearing house, etc. The association had the power to declare a dividend out of its profits, though it had not done so since 1906. The association had been assessed to incometax on the excess of receipts over its expenditure. The association had contended before the Special Commissioners that it did not carry on a trade, etc., the profits of which were assessable under Case I of Sch. D and that so far as concerns transactions with its members, the association was a mutual one, and that any surplus arising from such transactions was not a profit assessable to income-tax. The Special Commissioners confirmed the assessments. On a case being stated for the opinion of the King's Bench Division of the High Court, Rowlatt J. hold that any profit arising from the association's transactions with members was assessable to income-tax as part of the profits under Case I of Sch, D) and that the entrance fees and subscriptions received from members must be included in the computation of such profits. Rowlatt J. made the following observations on which Mr. Joshi relied (p. 453):

But in a case of this kind, where there is a share capital, with chance of dividends, a chance of a right to dividends if declared, upon the, share capital, and to one side of that a dealing with people who happen to be the owners of the share capital, affording benefits to those people one, by one individually, for which they pay money by way of subscriptions and by way of entrance fees as a sort of overriding subscription, if I may use that word, which opens the door to subscriptions, there is no reason at all for saying that you are to neglect the incorporation, or that you can regard otherwise than as profits the difference which is obtained by dealings between that corporation and people who happen to be its members."

According to Mr. Joshi, Rowlatt J. has described the entrance fee as a sort of overriding subscription and, therefore, according to him, the entrance fee must be treated on the same footing as subscription. Since subscription was a part of the income of the assessee, the overriding subscription also, according to Mr. Joshi, must be treated similarly.

Now, there is no doubt that the entrance fee has been described by Rowlatt J. as " as a sort of overriding subscription ". What has, how, ever, to be borne in mind is that there is no reasoning in the judgment as to why the entrance fee and the subscription were treated as having the same character of payment. It must also be appreciated that the main question which fell for determination before Rowlatt J. was whether the association in question was a mutual association or it was a trading company and the question was whether the profits obtained as a result of dealings between the corporation and its members should be regarded as profits as such. The decision seems to have proceeded on the footing that the association may profit from receiving the entrance fee and the sub, scription for the various facilities as will be clear from the manner in which the case has been approached in the following paragraph (p. 452)

" Now, the question is here, whether, so far as this company makes profit out of what the members pay to it, that is taxable income of the business which they undoubtedly carry on. That alleged profit consists of the amount by which the entrance fees of the members and, their sub, scriptions for the various facilities, if I may use that general word, exceed the amount which is to be taken to be the cost of keeping up the buildings and affording the facilities."

The judgment in Liverpool Corn Trade Association's case [1926] 10 TC 442 (KB) does not indicate that it was ever disputed in that case that the entrance fees constituted the income of the association. That decision cannot, with respect, be taken as an authority laying down that the entrance fees and the annual subscription must always be treated on the same footing for the purpose of deciding whether the entrance fees could be treated as income or not.

We are, therefore, inclined to take the view that the amount of Rs. 2,500 which is described as entrance fees paid by a life member must be dissected and a sum of Rs. 500 out of the total amount paid by way of entrance fees by a life member, must be treated as a capital receipt and the balance must be treated as income.

Consequently, for the years 1963-64 and 1964-65 when the entrance fees for life members was Rs. 2,500 and the entrance fees for ordinary members was Rs. 500 an amount of Rs. 500 out of the entrance fees paid by a life member will have to be treated as a capital receipt in the hands of the assessee and Rs. 2,000 as income of the assessee.

It was pointed out to us that during these two years, a widow of life member had also become a life member by a payment of Rs. 500 and that the entire amount should be treated as a capital receipt.

Now, it is true that the question with regard to the amount received by way of entrance fees paid by a widow does not appear to have been separately dealt with or agitated either before the I.T. authorities or before the Tribunal. But since we are not in this reference going into the computation of the capital receipts and income and we are only laying down a principle which has to be applied and it is likely that while going into the details of the persons who became life members, a widow of a life member also may have become a life member in the assessment years 1963-64 and 1964-65, we propose to lay down the principle even with respect to the computation in such a case. At the material time, the relevant provision of the articles of association enabling a widow to become either a life member or an ordinary member is to be found in article 13A, which reads as follows:

"(a) Widows of patron, vice-patron, founder, life or ordinary members who have attained the age of 18 years at the date of the death of the member and are received in general society are eligible for admission to ordinary membership of the club in their own right on payment of an entrance fee of Rs. 150 ....... They shall in addition to the payment of the entrance fees pay the annual and/or local subscription payable by an ordinary member as provided for in bye-law 19.

(b) Widows of patrons, vice-patrons, founder and life members who have attained the age of 18 years at the date of the death of the member and are received in general society are eligible for admission to life membership of the club-in their own right on payment of an entrance fee of Rs. 500 payable in one instalment... They shall not be liable to pay any annual, local or monthly subscription."

According to the above article, the widow of a patron, vice-patron, founder or ordinary member could become an ordinary member, in which case she paid an entrance fee of Rs. 150. A widow of a patron, vice-patron, founder or life member could alone become a life member, in which case she had to pay an entrance fee of Rs. 500. If the widow became an ordinary member, she was required to pay annual and/or local subscription, as the case may be. However, in the case of a life member, she was not liable to pay any annual, local or monthly subscription. It appears that the old articles of association were replaced by the new articles of association and the new articles of association came to be adopted at the general meeting of the club held on 20th March, 1964. The new article dealing with widows of members eligible for membership is art. 21(a) and (b). Under art. 21, widows of members who have attained the age of 18 years are made eligible for admission to ordinary membership of the club in their own right on the payment of an entrance fee of Rs. 150 and, in addition to the entrance fee, such an ordinary member was required to pay the annual and or local subscription payable by an ordinary member as provided for in the bye-laws. Under art. 21(b) only widows of patrons, vice-patrons, founder and life members were made eligible for admission to life membership of, the club in their own right on the payment of an entrance fee of Rs. 500 payable in one instalment and she was not then liable to pay any annual, local or monthly subscription. In the assessment years 1963-64 and 1964-65, we are not concerned with the changed article. Under the original articles, therefore, even the widow of a life member could become an ordinary member in which case she would be required to pay annual and/or local subscription., In case a widow of a life member wanted admission to life membership, she had to pay an entrance fee of Rs. 500 and she was not liable to pay annual subscription.

What is contended by Mr. Joshi is that the amount of Rs. 500 payable by way of entrance fee by the widow of a life member must also be split up on the same principle on which we have split up the entrance fee payable by a life member. On the other hand, it is vehemently contended by Mr. Dastur that if an amount of Rs. 150, which is the entrance fee for the widow either of an ordinary or a life member for getting admission as an ordinary member, is deducted from Rs. 500 then the balance of Rs. 350 could hardly be considered as being in the nature of a commutation as compared with the large amount of Rs. 2,000 which, at the material time, was treated as a compounded payment for the annual subscriptions made by a life member. Now, we have already pointed out above that it was at the discretion of the club as to at what figure they would compound the annual subscription payable in the case of a life member. The same will be the case in the case of a widow. It is possible to take the view that the husband of the widow of a life member having already paid the annual subscriptions in a lump sum, a concession might have been given to the widow of such a life member and she is relieved of the recurring liability to pay any other subscription year after year if she paid a lump sum amount of Rs. 500, a part of which must obviously be treated as entrance fees. This amount would be the same as the normal entrance fee payable by a widow for becoming an ordinary member. Therefore, even in the case of a widow of a life member, the amount of Rs. 500 paid by her by way of entrance fee is liable to be dissected and out of this amount Rs. 150 must be treated as a capital receipt and the balance of Rs. 350 must be treated as the income of the assessee.

Accordingly, the question referred to us is answered as follows:

In respect of the assessment years 1963-64 and 1964-65, out of the amounts received on account of entrance fee from life members, Rs. 500 should be treated as a capital receipt and the balance of Rs. 2,000 should be treated as the income of the assessee. In case an ordinary member becomes a life member on payment of Rs. 2,000, the entire amount of Rs. 2,000 should be treated as the income of the assessee. In case the widow of life member becomes a life member on payment of Rs. 500, a sum of Rs. 150 out of this amount of Rs. 500 shall be treated as a capital receipt and the balance of Rs. 350 as the income of the assessee.

The fair order in respect of costs in this case would be that the parties should bear their own costs.

 

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