Income Of Club Involving Contributions From Its Members Is Not Subject To Taxation On Principles Of Mutuality: Calcutta HC

Finding that there was a lack of analysis and examination of the facts in the previous orders, necessitating further review, the Calcutta High Court remanded the appeals filed by Saturday Club Ltd. (assessee) to the Income Tax Tribunal (ITAT) for a reconsideration of the facts concerning the principle of mutuality in the transaction between the assessee and Reliance Industries Limited.

The Division bench of Justice I.P. Mukerji and Justice Biswaroop Chowdhury observed that “The concept of mutuality is that whenever money is being spent by a particular member is also being enjoyed by that person in the form of facilities. Members or a group of persons forming the association and the association are seen as a single identity. One cannot make an income out of any sum paid to oneself or spent on oneself. In charging a member for such utility the club should not make any profit. In other words, it does not make any income in excess of its expenditure”.

Noting that the transactions ought to have been for the benefit of all the members and resulted in common facilities for the club, the Bench highlighted that on said principle, the income of the club involving contributors and participators is not taxable.

While acknowledging that the counsel representing the appellant made extensive arguments based on the principle of ‘mutuality’, the Bench elaborated that the principle of mutuality entailed that when a member spends money, they also enjoy the corresponding facilities provided by the club.

Observing that the club should not make a profit from charging members for these utilities, and the transactions should benefit all members and contribute to the common facilities of the club, the Bench stated that the income of the club, which involved contributions and participation from its members, was not subject to taxation.

Senior Advocate R K. Murarka appeared for the Appellant, whereas Advocate Prithu Dudhoria appeared for the Respondent.

In this case, the appeals involved the question of whether the rent received by the assessee from Reliance Industries Limited for the occupation of a portion of its premises should be taxed under the category of ‘Income from house property’. Initially, the Assessing Officer had ruled in favour of taxing the rent under this category. However, on appeal, the Commissioner of Income Tax (Appeals) reversed this decision and deleted the disallowance made by the AO. The ITAT later restored the AO’s decision.

After considering the submission, the Bench observed that the matter at hand involved questions of facts that needed to be thoroughly established before forming an opinion on the substantial question of law.

Upon examining the orders of the AO, CIT (Appeal), and the ITAT, the Bench found a lack of analysis of the facts regarding whether the principle of mutuality was being maintained in the subject transaction between the assessee and Reliance Industries.

Accordingly, the Bench remanded the appeals to the ITAT to redecide the question considering all the disclosures of facts made before the adjudicating authorities.

Cause Title: The Saturday Club Ltd v. Principal Commissioner of Income Tax

Click here to read/download the Order