Hennur Banaswadi Cosmopolitan Club Vs ITO (ITAT Bengaluru)
Once Mutuality Is Accepted, Miscellaneous Club Receipts Cannot Be Taxed in a Lump Sum Without Examining Their Individual Nature
The assessee was a members’ club registered as an Association of Persons. It provided sports, recreation, gymnasium, cafeteria, bar and other facilities to its members. Its principal receipts consisted of membership charges and interest from bank deposits.
The assessee filed its return declaring an income of ₹1,35,970. During scrutiny assessment, the Assessing Officer noticed that the club was not registered under section 12A. On that basis, the AO treated various receipts of the club as taxable and made additions towards liquor sales, indirect income, rent and repairs and maintenance. The assessment was completed at ₹89,43,953, as against the returned income of ₹1,35,970.
Before the CIT(A), the assessee clarified that it was not a charitable trust and had never claimed exemption under section 11. Its claim was based on the principle of mutuality and not on registration under section 12A.
The assessee submitted that receipts from liquor sales, billiards, kitty, sports and other club activities arose exclusively from transactions with its members. It also explained that certain expenditure represented lease rent, bar licence renewal fees, property tax and pollution-control renewal fees. Payments to governmental authorities did not attract TDS. Similarly, expenditure on bar, sports and general maintenance did not result in the creation of any capital asset.
The CIT(A) accepted the fundamental contention that the assessee was a members’ club operating on the principle of mutuality. Consequently, the additions made merely because the club did not possess registration under section 12A were deleted.
However, the CIT(A) called upon the assessee to establish that the building fund of ₹4,60,000 was received exclusively from members. The assessee was also required to explain the mutual character of other receipts aggregating to ₹26,94,372, which included:
- Sale of old cards and bottles;
- Tender application fees;
- Unclaimed balances;
- Bank interest;
- Miscellaneous income;
- Royalty;
- Facility charges;
- Hall rent; and
- New Year sponsorship receipts.
According to the CIT(A), despite several notices, the assessee failed to furnish the necessary supporting evidence. He therefore confirmed an aggregate addition of ₹31,54,372.
Assessee Claimed That Crucial Notices Were Never Served
Before the Tribunal, the assessee contended that the CIT(A), having accepted the applicability of mutuality, could not confirm the entire amount without examining the nature and source of each receipt.
The assessee further stated that the notice dated 08-08-2024, calling for member-wise details and supporting evidence, was never served upon it. The hearing notice dated 20-08-2024 was also stated to have not been received.
It was pointed out that, in response to another notice dated 14-08-2025, detailed written submissions had been uploaded along with Form No. 35, appeal notes, submissions filed before the AO, Memorandum of Association, notes on activities and financial statements. However, the CIT(A) recorded that no response had been received.
The assessee requested one more opportunity to furnish member-wise details, ledgers, receipts and other documents establishing whether each receipt was covered by the principle of mutuality. It fairly accepted that bank interest and receipts from non-members could be considered separately in accordance with law.
ITAT Restores Matter for Receipt-Wise Examination
The Tribunal observed that there was a clear factual dispute regarding the service of notices and the compliance allegedly made by the assessee.
The documents which the assessee claimed to have uploaded had not been examined by the CIT(A). Although the assessee expressed its willingness to furnish further clarification, the additions were confirmed without providing an effective opportunity to establish the nature of the receipts.
The Tribunal therefore set aside the order on this issue and restored the matter to the CIT(A) for fresh adjudication.
The assessee was directed to furnish complete supporting evidence regarding the building fund and each category of receipt. The CIT(A) was directed to examine the documents and determine the taxability of every receipt separately, applying the principle of mutuality and the applicable provisions of law.
The assessee was also directed to cooperate with the appellate proceedings and avoid unnecessary adjournments. The appeal was accordingly allowed for statistical purposes.
Author’s Comments
The ruling does not hold that every receipt of a members’ club is automatically exempt. Its importance lies in recognising that once the club’s basic mutual character has been accepted, the taxability of each receipt must be examined separately.
Receipts from members for common club facilities may ordinarily satisfy mutuality, provided there is complete identity between the contributors and participators. On the other hand, bank interest, sponsorship income, royalty, hall rent or receipts from outsiders may fall outside mutuality, depending upon their precise source and surrounding facts.
The decision also draws an important distinction between exemption under sections 11 and 12 and exemption based on mutuality. Registration under section 12A is not a precondition for a genuine members’ club to claim the benefit of mutuality.
At the same time, the burden remains upon the club to establish, through member-wise records, receipts, ledgers and supporting documents, that the particular contribution originated from members and was applied for their common benefit. Thus, acceptance of the club’s mutual status is only the starting point; the character of each disputed receipt must still be independently verified.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT, BENGALURU
1. This appeal has been instituted by the assessee against the order of the Ld. CIT(A) passed under section 250 of the Act dated 13.10.2025 for the assessment year 2017-18.
2. In the memo of appeal, the assessee has raised as many as 10 grounds of appeal, which we for the sake of brevity and convenience are not inclined to reproduce here.
3. All the Grounds are interconnected and pertain to the addition made by the AO and sustained by the Ld. CIT(A) on account of certain receipts of Rs. 31,54,372 without examining the nature and source of each receipt.
4. The brief facts of the case on hand are that the assessee is a members club registered as an AOP. It provides sports, recreation, gymnasium, cafeteria, bar and other facilities to its members. The principal receipts of the assessee consist of membership fees charges collected from members and interest from bank deposits. The assessee claimed that its activities were governed by the principle of mutuality. For the captioner AY, it filed its ROI declaring total income of Rs. 1,35,970/- only. The case of assessee was selected for complete scrutiny.
4.1 During the assessment proceedings, the AO observed that the assessee was not registered u/s 12A of the Act and, therefore, treated its receipts as taxable. The AO also recorded that no reply was filed to the show-cause notice issued and made additions towards liquor sales, indirect income, rent and repairs and maintenance. Accordingly, the assessment was completed u/s 143(3) of the Act at Rs. 89,43,953 as against the returned income of Rs. 1,35,970.00 only.
5. Aggrieved by the order of AO, the assessee filed an appeal before the Ld. CIT(A).
6. Before the Ld. CIT(A), the assessee submitted that it was not a charitable trust and had never claimed exemption u/s 11 of the Act. It was submitted that the assessee was a members’ club operating on the principle of mutuality.
6.1 The assessee contended that the receipts from liquor sales, billiards, kitty, sports and other club activities arose exclusively from dealings with members. It was further submitted that the amount of Rs. 23,63,749 included lease rent, bar license renewal fees, property tax and pollution control renewal fees, and that TDS was not applicable to payments made to Government authorities.
6.2 With respect to repairs and maintenance of Rs. 33,98,939, the assessee submitted that the expenditure related to bar maintenance, sports maintenance and general repairs and did not result in the creation of any capital asset.
6.3 The assessee also contended that a reply to the AO’s show-cause notice had been filed electronically on 19.12.2019 and a hard copy had also been submitted. Therefore, the AO was not correct in recording that no reply had been furnished.
6.4 The Ld. CIT(A) accepted that the assessee operated on the principle of mutuality. Accordingly, the additions made by the AO merely for want of registration u/s 12A of the Act were deleted.
6.5 However, the Ld. CIT(A) required the assessee to prove that the building fund of Rs. 4,60,000 was received only from members. The assessee was also required to establish the mutual character of receipts relating to the sale of old cards and bottles, tender application fees, unclaimed balances, bank interest, miscellaneous income, royalty, facility charges, hall rent and New Year sponsorship. The Ld. CIT(A) observed that several notices were issued, but the assessee failed to furnish the required details. Therefore, the Ld. CIT(A) sustained the addition of Rs. 4,60,000 towards building fund and Rs. 26,94,372 towards the other receipts. Thus, an aggregate addition of Rs. 31,54,372 was confirmed and the appeal was partly allowed.
7. Aggrieved by the order of the Ld. CIT(A), the assessee filed an appeal before us.
8. The Ld. AR before us submitted that the Ld. CIT(A), having accepted that the assessee was governed by the principle of mutuality, was not justified in confirming the addition of Rs. 31,54,372 without examining the nature and source of each receipt.
8.1 It was submitted that the building fund and various facility-related receipts were received from members and formed part of the common fund of the club. The assessee further submitted that the relevant supporting documents could not be furnished during the appellate proceedings due to lack of proper compliance with the notices. It was submitted that the hearing notice dated 8.08.2024, referred to by the Ld. CIT(A) in paragraph 6.3 of the impugned order, was never served upon the assessee. Therefore, the assessee had no opportunity to furnish the information sought in the said notice.
8.2 The ld. AR requested that one more opportunity be granted to the assessee to furnish member-wise details, ledgers, receipts and other supporting evidence to establish which receipts were covered by mutuality. It was also submitted that bank interest and any receipt from non-members could be separately considered in accordance with law.
9. The Ld. DR relied upon the order of the Ld. CIT(A). It was submitted that the assessee was specifically called upon to furnish evidence regarding the building fund and other receipts, but it failed to comply despite having been served with several notices. The Ld. DR submitted that the principle of mutuality could be applied only after the assessee established complete identity between the contributors and participators. In the absence of supporting evidence, the Ld. CIT(A) was justified in confirming the addition of Rs. 31,54,372.00 only.
10. We have considered the rival submissions of both the parties and perused the materials available on record. At the outset, we note that the Ld. CIT(A) issued a notice dated 08.08.2024 calling upon the assessee to furnish certain details. However, the said notice was never served upon or received by the assessee. The relevant contents of the notice are reproduced below:
1. The written submissions provided on 13.09.2021 as part of the appeal notes and the financials of the appellant were carefully considered. In this regard, you are requested to provide the following details:
a) Provide necessary proof that the building fund received during the year of Rs.4,60,000/- was received from members as part of the contribution only and not from outsiders. When the fact that the appellant had not claimed any exemption u/s 11 is appreciated, the credit of the capital fund without routing it through the profit & loss account is found to be incorrect. It may continue to be exempt under the principle of mutuality, if received from members and taxable if received from others. Provide necessary proof and clarity to this argument.
b) Please substantiate that the amounts received on sale of old cards, old bottles, tender application fee, unclaimed balance return of interest received from bank, miscellaneous income, royalty received, facility charges, hall rent received, sponsorship on the occasion of the New Year eve, fall under the concept of mutuality so as to remain exempt and that the income disclosed for the purpose of Income Tax of Rs.1,35,970/- is true and correct.
10.1 Further, the Ld. CIT(A) also issued 4 notices on various dates against which as per ld. CIT(A) no response was received from the assessee.
10.2 The dispute before us relates to the addition of Rs. 31,54,372, comprising building fund of Rs. 4,60,000 and other receipts of Rs. 26,94,372. The Ld. CIT(A) accepted that the assessee operated on the principle of mutuality but confirmed the aforesaid additions on the ground that the assessee had failed to furnish the details called for.
10.3 We note that the assessee has specifically contended that the notice dated 08.08.2024, as well as the hearing notice dated 20.08.2024, was never served upon it. The assessee has further submitted that, in response to the notice dated 14.08.2025, it had uploaded detailed written submissions along with Form No. 35, appeal notes, submissions filed before the AO, Memorandum of Association, notes on activities and financial statements. However, the Ld. CIT(A) has recorded that no response was received to the said notice.
10.4 In view of the above, there appears to be a factual dispute regarding service of the notices and compliance made by the assessee. The material claimed to have been filed by the assessee has also not been examined by the Ld. CIT(A). Further, despite the assessee expressing its willingness to furnish any additional clarification, the additions were confirmed without granting an effective opportunity to substantiate the nature of the receipts.
10.5 Considering the facts and circumstances of the case, we are of the view that the matter requires fresh examination by the Ld. CIT(A). Accordingly, the impugned order on this issue is set aside and the matter is restored to the file of the Ld. CIT(A) for fresh adjudication after granting the assessee a reasonable and effective opportunity of being heard.
10.6 The assessee shall furnish complete supporting evidence regarding the building fund and each category of receipt. The Ld. CIT(A) shall examine the submissions and documents filed by the assessee and determine the taxability of each receipt in accordance with the principle of mutuality and as per law. The assessee is also directed to fully cooperate with the appellate proceedings and not to seek unnecessary adjournment. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.
11. In the result, the appeal of assessee is allowed for statistical purposes.
Order pronounced in court on 21st day of July, 2026
