ITO Vs. Gymkhana Club (ITAT Chandigarh)
The above captioned appeals have been restored back by the Hon’ble High Court of Punjab & Haryana for decisions afresh vide separate orders dated 30.11.2015 passed in ITA Nos. 690 of 2005 (O&M), 70 of 2006 (O&M), ITA No. 243 to 246 of 2006, 420 of 2006, 553 of 2008 (O&M), 883 of 2008(O&M) and dated 5.1.22015in ITA Nos. 277 &278 of 2011(O&M). The Hon’ble High Court has directed to adjudicate the issue as per directions given in the decision of the Hon’ble High Court passed in ITA No. 690 of 2005 (O&M) dated 30.1 1.20 15.
2. The common issue in all the appeals involved is as to whether the ‘principle of mutuality’ would be applicable in the case of assessee or not.
3. This is the second round of appeal before us. The brief facts relevant to the issue have been taken from ITA No. 1084/Chd/2009 for assessment year 2006-07. The assessee, Gymkhana Club, Sector 6, Panchkula has been incorporated as a society registered under the Societies Registration Act, 1860 on 17.1.1994 by the Registrar of Societies, Haryana. The assessee club filed its return of income for assessment year 2006-07 on 31.10.2006 returning nil income on the ground that it was a mutual concern. The cases was picked up for scrutiny by the Assessing Officer. The Assessing Officer perused the tax audit report for assessment year 2006-07 filed by the assessee and noticed that there was surplus of income over expenditure at 35,72,08 1/- including interest income amounting to Rs.21 ,95,943/-. He also examined the claim of the assessee that it was a mutual concern and, therefore, exempt from tax. He scrutinized the Memorandum of Association and the by-laws of the society and noticed that the management and control of the assessee was wholly and exclusively vested in HUDA (Haryana Urban Development Authority) and, therefore, it was de-facto an extended arm of HUDA. He noticed that the assessee had made substantial investments in the form of FDRs in bank over which the members had no control and that it was HUDA which actually had control over the funds including FDRs. He also noticed that the contributors to the funds were neither entitled to participate in the surplus nor otherwise had any say in the management including finances/funds of the club. He also noticed that the Club facilities were being extend to certain non-members against payments made by them and thus Club is also involved in profit making activities from third parties. Taking into account the totality of facts and circumstances of the case as narrated in detail in the assessment order, the Assessing Officer held that there was no identity between the contributors and the participants and, therefore, he rejected the claim of the assessee that it was a mutual concern. In support of his decision, the Assessing Officer relied upon several decisions including those of the Hon’ble Jurisdictional High Court. In this view of the matter the entire surplus shown by the assessee in its account including interest income was brought to tax by the Assessing Officer.
4. Aggrieved by the order of the Assessing Officer the assessee filed appeal before the Commissioner of Income-tax (A) who, following the order of this Tribunal in assessee’s own case for assessment year 2004-05, allowed the claim of the assessee.
5. Aggrieved by the order passed by the Commissioner of Income Tax (A), the Department preferred appeal before this Tribunal. The Tribunal vide order dated 28.2.2011 dismissed the appeal of the Revenue observing that the facts for the year under consideration i.e. assessment year 2006-07 were identical to that of assessee’s case for assessment year 2004-05. That even in the earlier years, the issue had consistently been decided by the Tribunal in favour of the assessee. The matter had been further carried over to the Hon’ble High Court which was pending for adjudication. It was, therefore, held that there was no reasons to deviate from the ratio laid down in earlier decisions of the Tribunal. The Tribunal accordingly dismissed the appeal of the Revenue and held that the principle of mutuality was applicable to the assessee club and, hence, the income of the assessee club was not taxable. It is pertinent to mention here that earlier the issue whether the principle of mutuality applies to the assessee concern has arisen in assessment year 1997-98. The matter traveled to the Hon’ble High Court. The Hon’ble jurisdictional High Court while adjudicating the issue as to whether the principle of mutuality would be applicable in the case or not, while relying upon the decisions of the Hon’ble Supreme Court in the case of ‘Bangalore Club Vs. CIT’ (2013) 350 ITR 509 (SC) summed up the conditions laid down for the applicability of doctrine. The relevant partof the order dated 30.10.2015 passed in ITA No. 690 of 2005 for assessment year 1997-98 is reproduced as under:-
“13. The conditions for invoking the principle of mutuality have been recently enumerated by the Apex Court in Bangalore Club’s case (supra) wherein after considering various other pronouncements of the Supreme Court and the High Court on the subject, it has been laid down that principle of mutuality relates to the notion that a person cannot make a profit from himself. The concept of mutuality has been extended to defined groups of people who contribute to a common fund, controlled by the group, for a common benefit. Any surplus amount to that needed to pursue the common purpose is said to be simply an increase of the common fund and as such neither considered income nor taxable. Broadly, the following conditions have been laid down for the applicability of doctrine of mutuality:-
(i) The first condition to invoke the principle of mutuality requires that there must be a complete identity between the contributors and the participators;
(ii) the second feature demands that the action of the participants and the contributors must be in furtherance of the mandate of the association. However, in the case of a club, the steps have to be taken in furtherance of activities that benefit the club and in turn its members. The condition postulates a direct step with direct benefits to the functioning of the club. The mandate of the club requires to be examined in the factual matrix keeping in view the memorandum or articles of association, rules of membership, rules of the organization etc. However, it cannot be construed myopically. In some situations, the benefit may be evident directly in the short run, in others, they may be accruable to an organization indirectly, in the long run and the space must be made for both such forms of interactions between the organization and its member;
(iii) Further, there must be no scope of profiteering by the contributors from a fund made by them which could only be expended or returned to themselves and it is a difficult question of fact that at what point mutuality ends and commerciality begins.”
6. The Hon’ble High Court further observed that the Tribunal while adjudicating the appeal had not recorded any definite finding of fact on the basis of the legal enunciations on this issue. The Hon’ble High Court therefore, remanded the matter back to the Tribunal to adjudicate the same and pass a speaking order after hearing both the Following the said order dated 30.11.2015 for assessment year 1997-98 passed in ITA No. 690 of 2005 (O&N), the Hon’ble High Court subsequently restored the matter to the file of the Tribunal for all subsequent years accordingly.
7. The appeals of the Department in some of the years have already been dismissed being tax effect involved therein less than Rs. 10 lakhs and thus the same being not maintainable as per Circular No. 21/2015 of CBDT dated 10.12.2015, which has been made applicable retrospectively to the pending appeals also. Since the tax effect involving in the captioned appeals is more than the monetary limit prescribed, hence, the captioned appeals were heard on merits as directed by the Hon’ble High Court.
8. The main contention of the Revenue is that the assessee club has been formed under the control of Haryana Urban Development Authority (HUDA) which is authority established by Haryana Government. HUDA is totally a Government entity. The Chief Administrator of HUDA is an ex- officio president of the assessee club. The Memorandum of Association further provides for constitution of a Board of Patrons consisting of Vice Chairman, HUDA & Chief Secretary to the Govt. of Haryana, P.S.C.M., Commissioner & Secretary to Govt. of Haryana in the Department of Town & Country Planning, Chief Administrator, HUDA and a Representative of Defense Services (Western Command) not below the rank of Lt. Gen. (To be nominated). The Board of Patrons has veto power on the decisions taken by any committee/body of the society. The Memorandum of Association also provides for the constitution of an Executive Committee to look after the day-to-day management of the club. The Executive Committee consists of the President who has necessarily to be the Chief Administrator, HUDA, Vice President of the Society who has to be the Administrator of HUDA and similar other officers of the Govt. The above-mentioned officials of HUDA exercise control over the assessee club.That assessee club is not independent entity but working under the control of HUDA. All the financial decisions are being taken by HUDA authority. Besides this, President, Vice President and other members are also not elected from the members of the club. All the expenditure is incurred through HUDA. This issue of control is being highlight to show that there is no complete equality between the contributors of the club. Further, the assessee club is receiving interest income from fixed deposits held with various banks. These amounts deposited in fixed deposits have mostly been received from members of the club as membership fee, renewal fee or in the form of other charges like subscriptions and guest charges. This whole amount is deposited with various banks. The withdrawals of this amount and the use to which it can be put, is totally in the hands of the management of the club, which comprises, the official of Haryana Government i.e. Chief Administrator. It has also been contended that as per clause 5(d) of the Memorandum of Association, upon the winding up or dissolution of the society, if, there remains after satisfaction of all its debts and liabilities any property,the same shall not be paid to or distributed among the members of the society, but shall be given or transferred to some other Institution having objects similar to the objects of the society to be determined by members of the society at or before the time of dissolution. The Ld. DR therefore has contended that the surplus is not shared by members of the club, hence principle of mutuality does not apply to the case of assessee society.
9. On the other hand, the contention of the Ld. AR has been that though, as per the Memorandum of-association, for administrative purposes, the management of the club has been given to the High officials of the HUDA, however, the funds of the Club are used for the common purposes and benefits of members.Contributions to the funds as well as participators were completely identifiable. That as per the objects of the Society funds of the Club can be applied towards the promotion of the objects of the Club and no portion thereof can be paid or transferred directly or indirectly to the members of the Club / Society. He has also relied upon the winding up clause in the memorandum of the society and has submitted that after satisfying its liabilities, the remaining assets / properties is not to be paid or distributed among the members of the society but shall be given or transferred to some other institution having objects similar to that of the Society. He, therefore, has stated that no profit element is involved in the activities of the society and that the ‘principle of mutuality’ is applicable to the assessee society.
10. We have considered the rival contentions and have also gone through the records. Before going deep in the controversy, it is imperative to firstly discuss the aims / objectives and other relevant conditions and clauses regarding its constitution and membership. The aims and objects of the society have been enumerated in para 4 of the memorandum of Association, which reads as under:-
“Aims / Objectives & functions of the Society
The objectives for which the Society is formed are –
i) To afford its members all the usual privileges, advantages and conveniences of a Club Society.
ii) To promote understanding and amity among st the members of the Club ! Society
iii) To provide facilities for development of physical, cultural and taking of healthy exercises,by providing all type of amenities for imparting instructions, in the games such as swimming, tennis,badminton, table tennis,billiards, squash and other indoor as well as outdoor games etc.
iv) To invite as and when feasible, renowned artists, masters, sportsmen, cultural leaders, scholars, scientists and creative artists, who may or may not be members of the Society to take advantage of the facilities offered by the Society.
v) To promote or hold either alone or jointly with any association or persons, meetings, tournaments, competitions and matches relating to games to other health–exercise and to offer, give or contribute prizes, medal and awards and to promote, give or support dance, concerts and other social supporting or cultural, entertainments events.
vi) To establish, promote or assist in establishing or promoting and to subscribe to or become a member of any other Association whose objects are similar or in part of similar to the objects of the Club or the establishment or promotion of which may be beneficial to the Club. The HUDA Gymkhana Club may affiliate with any other ”
11. Article 5 deals with the ‘condition’ which provides that income and property of the Society shall be applied towards the-promotion of the objects of the society and no part thereof shall be transferred directly or indirectly to the members of the Society. Further, no member of the Governing Body of the Society shall be paid any salary. Further, clause (d) of Article 5, as discussed above, provides that on its dis solution of the club, the property will not vest in the members of the society rather the same shall be transferred to some other institution having objects similar to the objects of the Society. Article 6 deals with management and affairs of the society which says that the same will rest in a Governing Body of which the following will be the first members:
