The claim for exemption cannot be said to have been established either on the principle of mutuality or on the principle of the absence of trade or profit motive

Commissioner Of Income-Tax vs Madras Race Club on 13 August, 1975

Equivalent citations: 1976 105 ITR 433 Mad

Author: Sethuraman

Bench: V Ramaswami, V Sethuraman

JUDGMENT Sethuraman, J.

1. The assessee in these cases is the Madras Race Club, Madras. It was assessed to income-tax for the assessment years 1961-62 to 1964-65. It was incorporated as a company under Section 26 of the Indian Companies Act, 1913. The liability of the members is limited. It was established with the following objects :

“(a) To carry on the business of a race club in all its branches and in particular to lay out and prepare any lands for the running of horse races, steeplechases, of races of any other kind and for any kind of athletic sports, and for playing thereon games of cricket, bowls, golf, lawn tennis, polo or any other kind of game or amusement, recreation, sport or entertainment and to construct houses, grand or other stands, totalizators, pari-mutuels, booths, stabling paddocks, refreshment rooms and other erections, buildings and conveniences whether of a permanent or temporary nature which may seem directly or indirectly conducive to the club’s objects, to conduct, hold and promote race meetings and athletic sports, polo, lawn tennis, golf, and other matches, horse and other shows and exhibitions and otherwise utilise the company’s properties and sites and to give and contribute towards prizes, cups, stakes and other rewards;

(b) To take over the assets and liabilities of the present unincorporated club known as the Madras Race Club…..

(d) To establish any club, hotels or other conveniences in connection with the company’s property.”

2. We have omitted the rest of the clauses of the objects clause as they are not material. Under Clause 4 of the memorandum, the income and property of the club whensoever derived was to be applied solely towards the promotion of the objects of the club as set forth in the memorandum of association and no portion thereof was to be paid or transferred directly or indirectly by way of dividend, bonus or otherwise howsoever by way of profit to the members of the club. In Clause 5 it was stated that a licence was granted by the Government of India to the club in pursuance of Section 26 of the Indian Companies Act on the basis of the said condition in Clause 4. On the winding up or dissolution of the club if there was any surplus left it was not to be paid to or distributed among the members of the club, but had to be given or transferred to some other institution or institutions having objects similar to the objects of the club, or to such charitable object or objects to be determined by the members of the club at or before the time of dissolution, or in default thereof by the High Court of Judicature at Madras.
3. The members of the club fell into two classes, viz., club members and stand members. The number of club members was limited to 500 persons. The number of stand members was liable to be fixed by the committee of management at their discretion. The entrance fee for club membership was Rs. 500 and for stand membership was Rs. 200. The annual subscription for the club members was Rs. 100 and that for stand members was Rs. 25. The club members were admitted free on race days also, while the stand members were admitted to the enclosure on race days, only on buying season tickets or daily tickets. Only the club members, could exercise voting rights. The stand members were given amenities similar to those given to the club members, viz., to watch the races from a separate enclosure, to bet on the horses in the races, to use the totalizator and to partake of the refreshments available on the same terms as were provided to the club members.
4. The subscription received in the relevant assessment years under reference from the club and the stand members were as follows :

Rs.

1961-62 …..

54,085 1962-63 …..

55,880 1963-64 …..

59,660 1964-65 …..

60,145

5. The annual subscriptions received from the members were taxed as the income of the assessee till the assessment year 1960-61. In 1961-62 there was a claim for exclusion or deduction of the subscription receipts from the members on the ground that the assessee had a licence under Section 26 of the Indian Companies Act, 1913, corresponding to Section 25 of the Companies Act, 1956, that its object was promotion of sports and that it could not declare dividends. It was also stated that other race clubs had not been taxed on the subscriptions received from the members and that facilities were provided for the members in this case to engage themselves in games and sports like golf, billiards, tennis, etc., with all the amenities available in a members’ club. The subscription, it was claimed, must be related to those activities and not to the activities of the race club in conducting the races. The fact that the race club was taxable on the income derived from outsiders in the conduct of the races was not in dispute.
6. The Income-tax Officer considered that the provision of such amenities like golf, etc., was not one of the objects of the race club, that the main object of the club was to conduct horse racing and that there was no clause in the objects clause authorising the provision of the aforesaid other facilities extended to members of the clubs. In his view, if there were facilities like golf, they must be construed to be of a secondary nature and in no way connected with the primary object of the club. He, therefore, added back the subscription amounts mentioned above to the business income in making the assessments for the several years.
7. The assesses appealed to the Appellate Assistant Commissioner for each of these years objecting to the assessment of the subscriptions. The appeals for 1961-62 aad 1962-63 came before one Assistant Commissioner, while those for the succeeding years came before another. The appeals for 1961-62 and 1962-63 were dealt with by a common order passed on 20th March, 1965. The Assistant Commissioner, who heard and disposed of the said appeals, referred to Clauses 4 and 8 of the memorandum of association and held that the members who contributed and paid for some services and facilities were not entitled to receive back the amounts by way of participation in the profits and that, therefore, there was no scope for the application of the exemption on the basis of mutuality.
8. The Appellate Assistant Commissioner who dealt with the appeals for the assessment years 1.963-64 and 1964-65 passed a common order on 2Ist May, 1965. Obviously, he had not before him the order for the earlier two years, as he has not made any reference to it. He referred to the facilities and amenities provided, to the members like the lawn, a golf course, bar, billiards table, etc. He pointed out that these were the normal facilities in any club. He found no substance in the Income-tax Officer’s argument that the main activity of the assessee was only to carry on business. Ha referred to the assessee’s claim that the Bombay and Calcutta Race Clubs had not been taxed on the membership fees and held that the profits arising from the club activities were not taxable under the Income-tax Act. The existence of the combined accounts would not, in his view, entitle the Income-tax Officer to tax the non-taxable receipts also. On the view that expenses incurred in the management of the club had to be deducted and only the balance exempted, he estimated the surplus in the club activities at one-third of the gross-receipts, and took this as exempt under the Income-tax Act. He mentioned about the allowance of rest of the expenses in the computation of the business income. He reduced the total income by Rs. 20,000 for each of these years.
9. It may be mentioned, in passing that his discussion shows that he would estimate the expenses at two-thirds and exempt the balance of one-third from the levy of tax. The one-third liable to be exempted would thus be Rs. 20,000 approximately in each year and the reduction in the assessment would be Rs. 40,000 or thereabouts. However, he gave reduction only of Rs. 20,000 for each of these two years.
10. As the assesses had failed wholly for the assessment years 1961-62 and 1962-63 and as it had failed partially for the assessment years 1963-64 and 1964-65 before the Appellate Assistant Commissioner, it filed appeals before the Tribunal for all the years. The revenue filed appeals only for 1963-64 and 1964-65, as only in those years there was modification of the assessment in favour of the assessee to some extent. All the appeals came to be dealt with together by the Tribunal.
11. Relying on Clause 3(d) of the memorandum of association, which has already been extracted, the Tribunal considered that the establishment of a club was a separate object, distinct from the object of carrying on the business of horse racing. After referring to the availability of the provision for athletic sports, and for games like golf, lawn tennis, etc., the Tribunal pointed out that the assessee ran a club for the benefit of its members giving them the facilities of playing the aforesaid games and also a bar and a restaurant. It was pointed out that these activities were available to the members throughout the year even outside the racing season.
12. According to the Tribunal the income had to be bifurcated between the business of horse racing and the provision of ordinary club facilities. It considered that the principle of mutuality was applicable to the net receipts from members by way of subscription. It agreed with the Appellate Assistant Commissioner for the assessment years 1963-64 and 1964-65 in so far as he held that only a part of the subscriptions was liable to be exempted. Acting on the same basis the Tribunal determined the surplus attributable to the members’ subscription at Rs. 18,000 and Rs. 18,600, respectively, and reduced the taxable income by those amounts for the assessment years 1961-62 and 1962-63. For the assessment years 1963-64 and 1964-65, it upheld the Appellate Assistant Commissioner’s orders.
13. The revenue sought reference of the questions of law arising out of the Tribunal’s orders for all these four years. The Tribunal, in the first instance, referred in T.C. No. 253 of 1969 the following questions :

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surplus attributable to members’ subscriptions determined at one-third of such receipts was not chargeable to tax as the income of the assessee for the assessment years 1961-62, 1962-63, 1963-64 and 1964-65 ?”.

14. The Tribunal was directed by this court to refer the following further questions:

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal had material to hold and was right in law in holding that the activities in providing certain facilities like golf court, tennis court, etc., to its members constituted a distinct activity to be considered separately from other activities for purposes of income-tax assessment ?

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the club was a mutual association and that the income from the surplus of the subscriptions received from the members was not liable to tax ?”
3. These are the questions referred in T. C. No. 5 of 1972.
4. Basing himself on the form of the questions referred in T. C. No. 253 of 1969, the learned counsel for the revenue pointed out that the Tribunal went wrong in giving any reduction out of the receipts as subscriptions, as the entire expenditure had been allowed in all the four assessment years as claimed by the assessee. The learned counsel for the assessee submitted that the aforesaid question dealt only with the point regarding the charge-ability or otherwise of the subscriptions and that the allowance of expenditure in so far as it was held to be relatable to the subscriptions did not arise out of the Tribunal’s order. In the submission of the learned counsel for the assessee the reference to one-third of the receipts in the said question was only descriptive and did not purport to place before the court any problem of computation of income.
5. We have already mentioned that the Appellate Assistant Commissioner purported to give exemption only to the extent of one-third of the subscription. This would be clear from the following passage taken from the appellate order for the assessment year 1963-64 :

“Therefore, I have to estimate the profits arising from the club activities. Here the gross receipts shown by the assessee are Rs. 59,660. Against this, the expenses incurred in the management of the club should be deducted and only the balance should be exempted from tax. I would estimate the surplus in the clubs’ activities at one-third of the gross receipts. In most of the clubs the membership fee will be spent away in the activities of the club leaving very little surplus….. On the facts of the case, I would estimate the surplus at one-third of the gross receipts which is not taxable under the Income-tax Act.

The balance of the expenses have already been allowed while computing the business income of the assessee. Therefore, the total income is reduced by Rs. 20,000.”

18. If really only one-third was taxable, then the amount to be added back in the assessment would as already seen be Rs. 20,000. As Rs. 59,260 had been added back in the assessment for 1963-64, the reduction available to the assessee would be Rs. 39,660 and not Rs. 20,000. The Tribunal confirmed the orders of the Appellate Assistant Commissioner for 1963-64 and 1964-65 and also adopted the same basis for the assessment years 1961-62 and 1962-63. As rightly pointed out for the revenue the expenses having been allowed in full by the Income-tax Officer in computing the business income as claimed by the assessee, the only question open in the appeals before the Appellate Assistant Commissioner and the Tribunal was whether the several amounts added back by the Income-tax Officer were properly added back. Any reduction given by the Appellate Assistant Commissioner or by the Tribunal out of the members’ subscriptions, as if some expenditure remained to be allowed, would, therefore, be prima facie out of place. There is, however, no question before us as to whether the deduction given by the Appellate Tribunal in the manner done was proper. We do not examine or give a finding on this aspect. The only real question is whether the subscriptions received were eligible for any exemption as claimed by the assessee. We do not think it necessary to reframe the question. We would address ourselves to the question of taxability of the subscriptions.
19. One extreme contention advanced on behalf of the revenue was that where a club had taxable income from trading or business activities, then there was no scope for the application of any principle of mutuality, even assuming that the subscriptions could be brought within the ambit of this principle. In Carlisle and Silloth Golf Club v. Smith, [1912] 6 TC 48 there was a club, which was a bona fide members’ club, for the purpose of recreation and other purposes incidental thereto. It took on lease from a railway company an open land which was utilised as a golf club at a nominal rent on condition that the golf club was to be run there and that non-members would be allowed on payment of certain fixed amounts for the use of the golf course. There were enough visitors to avail themselves of this privilege. The revenue authorities sought to assess the entire profits or gains of the golf club consisting of receipts from members and non-members. The court held that in so far as the club engaged itself in granting facilities of playing golf to non-members, it was carrying on a trade or business, and the profit was liable to be assessed. As regards contributions from the members, the principle of mutuality was applied. With reference to the facilities afforded on receipt of “green fees” from non-members, Hamilton J. held as follows:

“Now it seems to me that that constitutes engaging in the carrying on of an enterprise which is in itself outside the scope of the club and is distinct from the ordinary objects and activities of the club;…..

I think, therefore, that at the outset the club has, for considerations sufficient in its own view, annexed to its ordinary enterprise of a golf club the rendering of services systematically to strangers for the purpose of obtaining, among other advantages to itself the revenue that those strangers provide…..; it is a case it seems to me at the outset in which this aggregate of gentlemen, who may for practical purpose be treated as one person, annexed to their club for the purposes of recreation an enterprise which is separate from it and which results in pecuniary receipts to themselves.”

20. This case, in our opinion, shows that the application of the principle of mutuality is not destroyed by the presence of transactions with, or profits derived from non-members. The said principle could apply to transactions with members. The maintenance of a combined account for all the transactions does not also affect the claim, as the way in which the accounts are kept is not conclusive in matters of taxation. The two activities can in appropriate cases be separated and the profits, if any, from the members, can be taken on the basis of the actuals from the accounts or, at any rate, by an estimate if it should become necessary. We are, therefore, unable to accept this part of the contention of the revenue. We are not shut out from considering the question of mutuality by virtue of (a) transactions with non-members or (b) maintenance of common accounts.
21. It was next contended for the revenue that the application of the principle of mutuality is excluded from this case because the memorandum of association provided that there could be no distribution of profits and that even on winding up the surplus was not divisible among the members, but had to be made over to entities having similar objects. In Commissioners of Inland Revenue v. Eccentric Club Ltd., [1925] 12 TC 657 (HL) there was a club which was incorporated as a company. The object of the company was to promote social intercourse amongst gentlemen connected with literature, art, music, drama, etc., and conduct a club of a non-political character. The members and their friends were to be given the usual privileges, advantages, convenience and accommodation of the club. Clause 6 of the memorandum provided that no member of the club in his character as such member was entitled to receive, directly or indirectly, any dividend, bonus or other profit out of such income or property of the club. On the winding up of the club if there was a surplus, then it was not to be distributed among the members of the club, but had to be given or transferred as the committee of management might determine. In spite of these features the Court of Appeal went into the applicability of the exemption and came to the conclusion that the assessee was not liable to be taxed. It is well-settled that the memorandum and articles of a company represent the contract between the company and the members. It is only by virtue of their ownership of the surplus assets, if any, that the members had agreed to the clause that they would not take back the surplus, but allow it to be transferred to any similar entity. As they themselves are to deal with the surplus, if any, at the time of winding up, it cannot be said that they are not participators in the surplus. The clause is only a fetter in the manner of disposal. The participation envisaged in the principle of mutuality is not that the members should willy-nilly take the surplus to themselves. It is enough if they had a right of disposal over the surplus to show that they were the participators.
22. Having cleared the ground regarding the above contentions, we nave now to address ourselves to the question whether the subscriptions received from the members are taxable. In other words, the point is whether the subscriptions enjoyed immunity from taxation absolutely. It is in this context that the application of the principle of mutuality also arises. We shall first go into the concept and scope of the principle of mutuality.
23. 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 per-sans 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. If this principle is borne in mind, then it would be easier to understand the decisions rendered on this point. It may be seen that in the above instance there is no trading as such. The same legal position would apply even where the parties join together and meet their commercial requirements in a manner mutually beneficial to them. In such a case there may be a trade inter se ; but the trade is not one intended to bring in any profits. It is this aspect which is referred to by Lord Normand in English and Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax, [1948] 16 ITR 270, 279 (PC) “the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.”
24. There is, however, nothing per se to prevent a company making a profit out of its own members. This is what happened in the case of English and Scottish Joint Co-operative Wholesale Society, where two co-operative societies promoted another co-operative society to own tea estates, the yield from which was sold to the two member societies at a price. The profit was held by the Privy Council to be taxable. Where in a banking business the transactions were restricted to members, the Supreme Court held in Commissioner of Income-tax v. Kumbakonam Mutul Benefit Fund Ltd., [1948] 16 ITR 270, 279 (PC) that the said principle did not apply. Therefore, the fact that the trade was confined to members or shareholders is not decisive of the issue. A company can make profit from its shareholders.
25. 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.
26. On the first aspect we may notice briefly two cases. In Styles v. New York Life Insurance Company, [1889] 2 TC 460 (HL) a company had no shareholders and no shares. It issued life policies of two kinds participating and non-participating. In the case of participating policies, the policy-holders had a voice in its administration and were entitled to a share of its assets and liable to all losses and expenses incurred by the company. The non-participating policy-holders were merely creditors without any interest in its assets and without any liability for its debts. The rate of premia paid for participating policies was different from or higher than that applicable to non-participating policies. In the case of participating policies the premia were not fixed, but fluctuating. A calculation was made of the probable disbursements of the company on account of expenses and other liabilities and the amount claimed as premia from policy-holders was adjusted in conformity with the estimate.
27. Then an account was annually taken of the transactions of that company, and the excess of the premia received from the members over expenditure after carrying part to a reserved fund, was repaid to them. The question was whether the surplus which was available with the company in excess of its requirement in relation to the participating policies was liable to be taxed even though it was actually returned later on to such policy holders. The House of Lords by majority held that so much of the surplus was not profit that was taxable. The principle deducible from this decision is brought out from the following passage at page 484 from the speech of Lord Macnaghten:

“I do not understand how persons contributing to a common fund in pursuance of a scheme for their mutual benefit, having no dealings or relations with any outside body, can be said to have made a profit when they find that they have overcharged themselves, and that some portion of their contributions may be safely refunded. If profit can be made in that way, there is a field for profitable enterprise, capable, I suppose, of indefinite expansion.”

28. In Jones v. South-West Lancashire Coal Owners’ Association Ltd., [1927] 11 TC 790 (HL) the sole activity was indemnity of its members, viz., coal owners, against compensation in respect of fatal accidents to workmen. It was a purely mutual concern, every person indemnified by the association being a member of the association. With reference to the surplus returned to the members Rowlatt J. pointed out at page 823 as follows :

“Where all that a company does is to collect money from a certain number of people–it does not matter whether they are called members of the company, or participating policyholders–and apply it for the benefit of those same people, not as shareholders in the company, but as the people who subscribed it, then, as I understand the New York case, there is no profit. If the people were to do the thing for themselves, there would be no profit, and the fact that they incorporate a legal entity to do it for them makes no difference, there is still no profit. This is not because the entity of the company is to be disregarded, it is because there is no profit, the money being simply collected from those people and handed back to them, not in the character of shareholders, but in the character of those who have paid it.”

29. The Court of Appeal confirmed the above view of Rowlatt J. The principle is that there is no trade between the members inter se in a mutual concern when they have certain mutual dealings intended to confer a common benefit.
30. On the other aspect, it is enough to refer to the decision in Commissioners of Inland Revenue v. Eccentric Club Ltd., [1925] 12 TC 657 (HL) A company, limited by guarantee, was incorporated, inter alia, to conduct a social club and to provide refreshments to members for payment. No member of the club was entitled to receive any dividend or bonus out of the profits, and on winding-up any surplus was not. to be distributed to members, but was to be dealt with as the committee of the club might determine. There were no receipts from anything in the nature of trade from persons other than members. On these facts it was held that the company was not carrying on a trade or business or undertaking of similar character. The principle laid down was that there was no aim or prospect of gain.
31. It is now well-settled that the incorporation of a company to carry on the activities of a club does not result in the deprivation of the admissi-bility of the claim for exemption based on concept of mutuality. The Supreme Court in Commissioner of Income-tax v. Royal Western India Turf Club Ltd., . laid down the principle as follows :

“Where a company collects money from its members and applies it for their benefit not as shareholders but as persons who put up the fund the company makes no profit. In such cases, where there is identity in the character of those who contribute and of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent members is to be disregarded always and that the legal entity can never make a profit out of its own members.” Thus, incorporation of a limited company would not take away the claim for exemption.

32. The result of the above discussion is that a company may be eligible for exemption of any surplus derived from the dealings of the members either on the principle of mutuality based on the doctrine that no one can make profit out of himself or on the basis that there is no trading or profit motive in the transactions between a club and its members. Is this company eligible for the exemption ?
33. The Appellate Tribunal has relied on the decision in United Service Club v. Crown, [1921] ILR 2 Lah. 109; AIR 1921 Lah. 208. The club was an incorporated company having no dealings with and deriving no profit from outsiders. The question raised was whether the income derived from its members was taxable. Relying on Styles’ case, i.e., Styles v. New York Life Insurance Co., [1889] 2 TC 460 (HL) and Carlisle & Silloth Golf Club v. Smith, [1913] 6 TC 198 (CA) it was held that under the English Law the income derived by a society or club from its members was not liable to tax and that the same principle should be followed in India. The Supreme Court referred to this case in Commissioner of Income-tax v. Royal Western India Turf Club Ltd., and observed (at page 562) that the proposition so broadly stated overlooked the decision in Styles’ case [1889] 2 TC 460 (HL) as explained in later cases and also the real principle in Carlisle and Silloth Golf Club v. Smith, [1913] 6 TC 198 (CA). After expressing the disapproval of the reasoning it was observed at page 562 as follows :

“His (Martineau J.) decision can only be supported on the ground that the club (the United Services Club) did not really carry on any business with its members with a view to earning profits and, therefore, the surplus of receipts from the members over the expenditure could not be said to be profit of any business which could be assessed to tax.” Again, at page 563, after referring to the case of Commissioners of Inland Revenue v. Eccentric Club Ltd., [1925] 12 TC 657 (HL) , it was observed as follows :

“There was in the case no carrying on of any business with any outsider. The dealings with members were really not in the way of any trade or business and it is only on that basis that the profits were held not to fall within the Finance Act. The position of the company in the United Services Club’s case was similar and, as already stated, that decision can be supported only on this principle”.

34. The decision in the United Services Club, [1921] ILR 2 Lah. 109; AIR 1921 Lah. 208 has, therefore, to be taken subject to the qualifications made by the Supreme Court. The Tribunal is, therefore, wrong in proceeding as if that decision concluded the point in issue before us. Unlike the case of the United Services Club in the present case the business of horse racing was carried on with a view to earn the profit and, therefore, for this reason also the decision in the United Services Club would not be applicable herein.
35. There was some discussion that similar subscription was not taxed in the hands of the Bombay and Calcutta Race Clubs. We have no idea of the constitution of those clubs to see if on identical facts exemption was granted by the income-tax authorities there, while tax is sought to be levied on identical facts herein. Assuming that the income-tax authorities had failed to tax the profits of the Race Clubs of Calcutta and Bombay, still that would not by itself be a ground to grant exemption. The question of exemption has to be considered on the basis of legal principles or statutory provisions and not on the basis of what the revenue authorities did or omitted to do. Further, as pointed out by Das J., as he then was, in Commissioner of Income-tax v. Royal Western India Turf Club Ltd., , the fact that the company in Bombay or Calcutta has enjoyed exemption from taxation is neither here nor there as there is no question of acquiring any prescriptive right to exemption from taxation.
36. The Tribunal has proceeded as if the Supreme Court has laid down in the above case that in no case subscriptions would be liable to be taxed. The taxability of the profits arising out of the members’ subscription was not in issue, in that case. The question as to whether the members’ subscription was taxable or not, not being in issue, cannot be said to have been decided by the Supreme Court so as to enable us to take that case as an authority for the proposition that members’ subscription could in no circumstance be held as taxable.
37. If we examine the facts of this case in the light of the above discussion, it would be found that the race club was admittedly carrying on business in horse racing. Have the subscriptions any relationship with this business ? As pointed out earlier, the club members pay an annual subscription of Rs. 100 and are admitted free on race days. The subscription is thus at least in part connected with the business of the racing activity. The contention that the subscription is for the separate activity of a members’ club is thus untenable. On the facts herein it appears to us that the club members have paid a contribution in advance to ensure free admission on all race days. The subscription is bound up with the business so that the principle of mutuality will not apply to it.
38. We have no precise idea of the facilities actually available in the club for attendance on non-race days, the expenditure incurred in such running of the club on non-race days and the surplus or deficit left in such activities as such. In the absence of those facts, it is not possible to see how far there is a completely distinct activity of running a members’ club and what the result of such activity is. We have further no precise information as to whether the golf course, the tennis courts, etc., were actually put into use by the members themselves on non-race days. It is thus difficult on the facts, as they are, to go into the question of the distinctness and separateness of the activities of the members’ club. Only if we are in a position to isolate the activities of the members’ club, it would have been possible to apply the decision of the Eccentric Club’s case, [1925]12 TC 657(HL).

and exempt the subscription received from taxation. The presence of the business element, as such, would not, then, be destructive of the claim for exemption if really the members’ club has been shown to have been run as a separte and distinct activity. As the subscription received is relatable also to the business aspect, the assessee cannot claim exemption of the whole of the subscription. It is now beyond question that in the case of a claim for exemption, the burden is on the assessee to justify the claim. This burden has not been discharged herein.

39. In the case of stand members Clause 4 of the articles of association provides that they were entitled to the amenities of the members’ enclosure at the race course on non-race days and that on race days they were entitled, on payment of the usual admission fees, to all the privileges of club members, except that club members would have, however, preference over all stand members in regard to balloting, application for luncheons, etc. The stand members are not entitled to any other privileges and are not to participate in the meetings of the club members. This clause, in our opinion, goes to show, on the facts as they are, that the stand members have paid mainly for the privileges of attending the race from the members’ enclosure on race days. As pointed out by the Supreme Court in the case of Royal Western India Turf Club, the principle of mutuality would not apply to a company carrying on the business of horse racing and realising the money both from the members and non-members for the same consideration by giving them the same facilities to all alike in the course of one and the same business carried on by it. It is not clear as to what benefit the stand members derived from merely being allowed the use of the members’ enclosure at the race course on non-race days. As full facts are not before us, it is not possible to deal with the claim for exemption in respect of the stand members any further.
40. The Privy Council in English and Scottish Joint Co-operative’s case and the Supreme Court in the Royal Western India Turf Club Limited’s case, have refrained from deciding what kind of business other than the mutual insurance might claim exemption from tax liability under the principle of Style’s case. We would not venture on it. We are satisfied, however, on the facts herein that the said principle has no application to the facts herein.
41. The learned counsel for the assesses relied on a decision of the Delhi High Court in Commissioner of Income-tax v. Delhi Race Club Ltd., in respect of his submission that the free admission in the enclosures enjoyed by the members was nothing more than a mere privilege referable to their membership without there being a profit-earning motive. In that case the race club had two categories of members, viz., regular members and life members. Regular members were required to pay an entrance fee and annual subscription, while life members paid the subscription for life. There were also stand members and honorary members. The stand members did not pay any entrance fee, but paid periodical subscriptions. All these members could attend the races without payment. With reference to the receipts from the members by way of subscriptions, the question arose as to whether it was taxable. The Delhi High Court held that the gratuitous privilege extended to the members for viewing and participating in the race was incidental to membership and that it was immune from every taint of commerciality. The finding in that case was that the members mainly paid for the amenities in the club and that the gratuitous facilities to attend the races was only incidental. In the present case, the facts as they are show that the primary purpose of the subscriptions was to get facilities to attend the races, the enjoyment of the club facilities on non-race days being only incidental or subsidiary. The said case is distinguishable on facts.
42. To summarise our conclusions, this is not a case where there is a contribution of monies by certain persons coming together for trading or non-trading purposes without any idea of making a profit. This is not also a case of a mere members’ club which comes into existence for the purpose of providing certain amenities to the members without any business element as such as in Commissioner of Income-tax v. Merchant Navy Club, . Therefore, the claim for exemption cnnnot be said to have been established either on the principle of mutuality or on the principle of the absence of trade or profit motive. The cases of chambers of commerce or trade associations cited before us stand on a different footing and cannot be applied herein. We may make it clear that if proper facts are placed in any other year, the matter may have to be considered afresh, in the light of those facts.
43. The result of the discussion is that the question in T.C. No. 253 of 1969 has to be answered in the negative and against the assessee and questions Nos. 1 and 2 in T.C. No. 5 of 1972 are also answered in the negative and against the assessee. The revenue will be entitled to its costs. Counsel’s fee Rs. 250.