Cricket activity by club is not a trade or business

Cricket Club of India Pvt. Ltd. Vs CIT (ITAT Mumbai)

Held that activity of cricket by the club cannot be said to be in the nature of trade or business.

Facts-

The assessee club is incorporated under the Companies Act of 1913 and came into existence on 9.11.1933 as a company limited by guarantee, each member guaranteeing contribution of Re. 1 each towards debts and liabilities including expenses costs and charges in the event of the company being wound up. The assessee is claimed to be a ‘mutual concern’ income of which is not chargeable to tax on principles of mutuality. This claim has been accepted in the past by the revenue.

The ROI for the Asst Year 2010-11 was filed by the assessee on 15.10.2010 declaring a total income of Rs. 1,93,57,341/-. The assessment u/s. 143(3) was completed vide order dated 30.03.2013 assessing the total income at Rs. 5,98,30,570/-. During the assessment proceedings, the assessee has also submitted revised computation of total income of Rs. 5,71,00,430/- by offering interest income & capital gains to tax pursuant to decision of Hon’ble Supreme Court in Bangalore Club Vs CIT reported in 350 ITR 509 (SC).

AO after due application of mind has added catering income by treating the said receipt being not covered under principle of mutuality. Thus, AO has accepted the applicability of Principle of Mutuality in respect of the majority receipts claimed by the assessee. However, PCIT has issued vide show cause notice u/s. 263 dated 19.01.2015 for revision proceedings as in his view the assessment order was erroneous and prejudicial to the interest of the revenue.

Conclusion-

Held that the assessee is a mutual association and the income from property let out to members is exempt from tax on the principle of mutuality.

Held that the fundamental nature of transaction which was examined year after year, has remained the same, the Ld. CIT was not entitled to pass a revision order u/s 263 of the Act and take a different view.

Hon’ble SC in the case of Cricket Club of India Vs. Bombay Labour Union and another has held that an activity in the course of promotion of the game of cricket and it is incidental that the Club is able to make an income on these few occasions which income is later utilized for the purpose of fulfilling its other objects as incorporated in the Memorandum of Association. The holding of the Test Matches is primarily organized by the Club for the purpose of promoting the game of cricket. Accordingly, the Hon’ble Supreme Court held that this activity by the Club cannot, by itself lead to the inference that the Club is carrying on an industry.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

This appeal in ITA No.3282/Mum/2015 preferred by the order against the revision order of the ld. Commissioner of Income Tax-1, Mumbai u/s.263 of the Act dated 30/03/2015 for the A.Y.2010-11.

2. The assessee has raised the following grounds of appeal before us:-

“1.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in initiating proceedings u/s.263 of the Income Tax Act, 1961 vide show-cause notice dated 19.01.2015 and passing the order u/s. 263 of the Income Tax Act, 1961 and the reasons assigned by him for doing so are wrong and contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder.

1. On the facts and in the circumstances of the case and in law, the appellant prays that the order of the learned CIT passed u/s.263 of the Income Tax Act, 1961 may be cancelled being void ab-initio and bad in law.

1. (c) The Id. Commissioner of Income Tax erred in invoking the provision of section 263(1) of the Income Tax Act, 1961 without appreciating the fact that the ld. Assessing officer action was in accordance with law as after making all possible enquiries, examination of facts and proper application of mind, completed the assessment of the assessee u/s 143(3) of the Income Tax Act, 1961 and thereby erred in presuming that the assessment has been passed under blind assumption of assessee being a mutual concern.

1.(d) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in setting aside the assessment and directing the ld. Assessing Officer to make fresh assessment and the reasons assigned by him for doing so are wrong and contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder.

1.(e) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in passing the order u/s. 263 of the Income Tax Act, 1961 on a ground of complete absence of application of mind by assessing officer and thereby erred in treating order of assessment perverse erroneous and prejudicial to the interest of the revenue which is wrong an contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder.

1.(f) On the facts and in the circumstances of the case and in law the learned CIT erred in not appreciating the position in law that the suo-moto revisional authority is not empowered to substitute his own judgement for that of the subordinate officer unless the decision of the subordinate officer held to be erroneous, perverse or contrary to law.

2.(a) On the facts and in the circumstances of the case and in law the learned CIT grossly erred in passing the order u/s.263 of the Income Tax Act 1961, by raising an entirely new issue which was never raised in any of the two show cause notices dated 19.01.2015 and 18.02.2015 issued to the appellant u/s.263 of the Income Tax Act, 1961. Hence, the learned CIT’s order dated 30.03.2015 is void ab-initio and not in conformity with the provisions of section 263 of the Income tax Act, 1961 and needs to be quashed in its entirely.

The following ‘new’ issues have been raised and made a basis of revision u/s 263:

(i) whether contributions made by members and their guests, including temporary members are covered by the principles of mutuality.

(ii) whether the activities of the appellant club are run so as to treat members and non-members at par in relation to provision of facilities.

(iii) whether the activities of the company are for the benefit of third party and outsiders as well.

(iv) whether income from flats is chargeable to tax as income from House Property in the facts of the case.

(v) whether guests of members are sufficiently limited in number so as to be treated as guests of members or are so large as to be qualified as outsiders permitted to use the facilities of the club.

(vi) whether temporary members can be categorized as outsiders admitted to benefits of the facilities provided by the assessee..

(vii) AO shall analyse whether receipts from members by way of entry fees and annual subscription etc. and remaining varieties of receipts are to be brought to charge of tax and under which head of income.

3.(b) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in passing said order which is beyond the reasons mentioned in the two show cause notices issued u/s 263, which is wrong and contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder.

3.(c) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in giving a finding that the assessee company is not a mutual company being devoid of any mutuality by the very structure of membership, their contributions by way of entrance fee and annual and local subscription and, the limitations on the kind of and consequently number of members entitled to surplus on dissolution.

3.(d) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in stating that class of temporary members is merely a surrogate membership for permitting outsiders to enjoy the benefit of amenities and facilities of the appellant club otherwise available to non temporary members.

3.(e) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in giving a finding that none of the receipts of assessee whether in the form of contributions by members as fee or subscription or by way of charges for particular game or sports shall be exempt from taxation” which is wrong and contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder:

2.(f) The ld.CIT failed to appreciate that existence of different classes of membership having varying subscription rates, rights and entitlements to facilities/surplus does not affect the principles of mutuality in term of Bombay High Court decision in case of CIT Vs. Willingdon Sports Club (302) ITR 279).

(i) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax failed to appreciate that entitlement of certain classes of members to sharing of surplus on dissolution cannot be the reason/ ground to deny the benefit of principle of mutuality.

3.(f) The ld. CIT failed to appreciate the following facts:

(i) Receipts generated from the members are not taxable on the principle of mutuality as upheld by Hon’ble SC in the case of Bankipur Club Ltd.and receipts from non-members which have been offered to tax will not affect the mutuality of receipts from members.

(ii) The said position has been accepted by the income tax department in all previous assessment year as such the action of Id.CIT to set aside the sustained position is not appropriate as per ruling of SC in case of Radhasoami Satsang (193 ITR 321).

3.(g) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in observing that one to one identity between contributors and participators is altogether missing in appellant’s case, without appreciating the fact that the condition requiring that the contributors to the common fund and the participators in the surplus must be an identical body does not necessarily mean that each member should contribute to the common fund or that each member should participate in the surplus but should be understood to mean that the members as a class should contribute to the common fund and participators as a class must be able to participate in the surplus. This is precisely laid down by SC in case of Bankipur Club Ltd. 226 ITR 97.

3.(h) The Id.CIT failed to appreciate that for the principle of mutuality it is sufficient if the identify as a class is established between the

(i) contributors and the participators and it is not necessary to have one to one identity individually.

(ii) it is not necessary to establish whether the facility available to members is actually utilized or not by each of the members.

3.(i) The ld.CIT failed to appreciate that the fact that all the members may not contribute or that they may not share the surplus or benefit in the ratio of their contribution does not affect the principle of mutuality as laid down by SC in Bankipur Club Ltd.

4.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in taking a view that exponential growth in operational income and investment made by the appellant and its large quantum leads to existence of commercial motives in contrast to mutuality which is wrong and contrary to the facts of the case, the provisions of Income Tax Act, 1961, and the Rules made thereunder.

4.(b) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in not appreciating the fact that assessee does not carry on any trade or commerce and is a sports/social club established with the object for mutual benefit among its members and for mutual interest.

4.(c) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax failed to appreciate that appellant club is mainly established for promotion of cricket in India and accordingly conducting international cricket matches and IPL matches at its own stadium i.e. the Brabourne stadium is in accordance with the objects of the appellant club.

4.(d) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in stating that the appellant exists primarily for promotion of game of cricket and the running of club is a secondary object, without appreciating that international cricket matches have been hosted by the appellant club at its own venue after many years.

4.(e) The Id. CIT erred in observing that the AO failed to look into aspects of mutuality in relation to cricket matters without appreciating that the appellant has in its Return of Income, offered to tax, the receipts from cricket matches being not covered by principle of mutuality and thereby erred in stating that new activity has not been brought on record.

4.(f) The Id. Commissioner of Income Tax erred in observing that the AO ought to have analyzed the terms of agreement for Test match and IPL matches and the implication of the agreement terms to the principle of mutuality without appreciating that the appellant company has in its Return of Income offered to tax all the receipts from conducting such matches on its ground and as such the order of AO is not erroneous and also is not prejudicial to the interest of the Revenue.

5. The ld. CIT failed to appreciate that:

• • CIT(A) whose order for A.Y. 2009-10 is the basis for issuing show cause notice for revision u/s 263 has completely misunderstood the claims made by the appellant as those being under section 11 of the Income Tax Act 1961.
  • Appellant is not undertaking any commercial activity and is sports /social club to provide sporting, recreational and other facilities for mutual benefit of its members.
  • the principle of mutuality is not destroyed or affected by the presence of transactions which are non mutual in character.
  • AO has fully applied his mind while passing the assessment order u/s.143(3) and his order is not erroneous so as to attract the provisions of section 263 of the Act
• Supreme Court in the case of Royal Western India Turf and Club Ltd (24 ITR 551) has given clear ruling in regard to exemption claimed by clubs on grounds of mutuality based upon the impossibility that contributors should derive profits from contributions made by themselves which could only be expanded for mutual benefit or retuned to themselves.

6.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax erred in giving direction that the interest income and capital gains cannot be treated as exempt under principle of mutuality and shall be charged to tax, without appreciating the fact that capital gains and interest income has already been offered to tax by the appellant in the assessment proceedings and as such the order is neither erroneous nor prejudicial to the interest of the revenue.

6.(b) On the facts and in the circumstances of the case and in law the learned CIT erred in directing the A.O. to investigate into the matter of claiming the interest income and capital gain as exempt income under principle of mutuality without appreciating that the said claims have been suo-moto withdrawn in the assessment proceedings u/s. 143(3) before the ld. AO.

7.(a) The learned CIT has erred in issuing notice w/s.263 on frivolous presumption and then directing A.O. to verify the presumption and give definite finding on the same. Such directions are illegal and not tenable in law.

7.(b) The ld. CIT erred in making various irrelevant and frivolous observations particularly that:

“(i) the assessing officer was misled to believe that assessee was not undertaking any activity involving profit in assertion that “it does not carry any trade or business”.

(ii) the assessee has deliberately misguided assessing officer so as to refrain him from looking into the new activity of International Cricket matches conducted at assessee’s premises after 36 years and IPL matches held here.

(iii) the maintenance of the ground and the pitches in a systematic manner, provision of various facilities including flood lights and visitor’s stand are all in a well designed framework to earn profit.

(iv) Tickets of the cricket matches have gone to a few members without any basis, kind of pick and choose, it is at the cost of other members. The ld. AO has not looked into the issue of how much MCA got from BCCI for hosting of the match. In effect the facilities of assessee have been used by outsiders who must have made profits in the process at the expense of assessee. The benefit thus accruing to outsiders is violative of mutuality. The assessing officer failed to recognize this fact. The order of assessments is therefore erroneous for the facts have not been brought on record at all.

(v) the assessee having made income out of receipts essentially in the nature of reimbursement goes to establish profit motive.

(vi) assessing officer ought to have looked into discrepancies and implication for mutuality. The IPL matches have always shown full house. The only possible conclusion is that the sitting space has gone to benefit outsiders whether with gratification or otherwise is not the issue right now. But the whole philosophy of mutuality gets destroyed in the process. (vii) cricket as an activity has been carried out for profit and in pursuing this activity, benefits have gone to third parties outsiders by way of pilferage of entry coupons” (without any evidence)

8. Without prejudice to the contention that the Assessing Officer’s order dated 30.03.2013 u/s.143(3) of the Income Tax Act, 1961 was not erroneous and prejudicial to the interest of revenue, the learned CIT has no power to cancel the assessment wherein the assessing officer’s order is subject matter of appeal and hence is illegal, invalid and not tenable. The CIT can give only specific directions on items which were found erroneous and prejudicial to the interest of revenue if any, which in this case were none.

The appellant craves leave to add, amend, alter, modify and/or delete any of the above grounds of appeal on or before the date of hearing.”

3. We have heard the rival submissions and perused the materials available on record. The brief facts of this case are that the assessee club is incorporated under the Companies Act of 1913 and came into existence on 9.11.1933 as a company limited by guarantee, each member guaranteeing contribution of Re. 1 each towards debts and liabilities including expenses costs and charges in the event of the company being wound up. The assessee is claimed to be a ‘mutual concern’ income of which is not chargeable to tax on principles of mutuality. This claim has been accepted in the past by the revenue.

3.1. The return of income for the Asst Year 2010-11 was filed by the assessee on 15.10.2010 declaring a total income of Rs. 1,93,57,341/-. The assessment u/s. 143(3) was completed vide order dated 30.03.2013 assessing the total income at Rs. 5,98,30,570/-. The said assessment was completed after taking into consideration the various submissions made by the assessee vide various letters in response to notices issued u/s. 143(2) & 142(1) of the Act by the Ld. AO from time to time. During the assessment proceedings, the assessee has also submitted revised computation of total income of Rs. 5,71,00,430/- by offering interest income & capital gains to tax pursuant to decision of Hon’ble Supreme Court in Bangalore Club Vs CIT reported in 350 ITR 509 (SC).

3.2. The ld. AO after due application of mind has added catering income by treating the said receipt being not covered under principle of mutuality. Thus, the ld. AO has accepted the applicability of Principle of Mutuality in respect of the majority receipts claimed by the assessee. However, the Ld. PCIT has issued vide show cause notice u/s. 263 dated 19.01.2015 for revision proceedings as in his view the assessment order was erroneous and prejudicial to the interest of the revenue. The Ld. PCIT has issued the said notice primarily relying upon the method adopted by the Ld. CIT(A) in AY 2009-10 wherein the Ld. CIT(A) enhanced the assessment by denying the mutuality principles and computed the total income on commercial manner. In response to the said notice, the assessee filed its reply vide letters dated 10.02.2015, 23.02.2015, 24.02.2015 & 09.03.2015 explaining the following:-

(i) That the Ld. CIT(A) has misunderstood the claim of the assessee as being u/s. 11 of the Act and thereby erred in holding that the assessee’s income has to be computed in commercial manner as applicable to “Trust’.

(ii) Assessee is a mutual association providing recreational & refreshment facilities exclusively to its members and as such most of the receipts are not chargeable to tax on the principles of mutuality. However, certain receipts earned from non-member being not covered by the principle of mutuality were offered to tax namely cricket income (Test matches, IPL matches), Rent income from House Property, Capital Gains on sale of investment and Interest Income on investments. In earlier assessment years, the principle of mutuality has been accepted by the department in assessee’s own cases.

Thus it was submitted that it is a settled principle of law that application of Principle of mutuality is not destroyed by transaction with non­members. The principle of mutuality can be still confined to transaction to members.

(iii) without prejudice, it was submitted that if the assessment is completed by adopting the method adopted by the ld. CIT(A) in AY 2009­10, then the assessed income, if reworked accordingly, would result in total loss of Rs. 2,55,19,015/-.

3.3. The Id. PCIT thereafter issued another notice dated 18.02.2015 calling for further details, in particular called for details related to Test matches and IPL Matches, as in his view, the Ld. AO has not analysed the revenue accruing to the assessee which may become a potential reason for holding that the order of Ld. AO is erroneous and prejudicial to the interest of revenue. In response, the assessee has filed necessary details vide letters and wherein it was categorically explained that the revenue from cricket activity (namely Test matches and IPL matches have been duly offered to tax. However, the Ld. PCIT rejected the contention of the assessee and vide order dated 30.03.2015 set aside the assessment order holding that the same was erroneous and prejudicial to the interest of the revenue on the following reasonings:

(i) The Ld. PCIT was of the opinion that the Ld. AO has simply accepted the claim of principle of mutuality which is contrary to the nature of activity undertaken by the assessee as in his view that the operation income and investment of the assessee are so large as to project existence of commercial motives in contrast to mutuality.

(ii) The identity between the contributors and participators in the facts of the case of the assessee is missing as variety of members contributes to the fund of the assessee but only few members are entitled to surplus.

(iii) The assessee exist primarily for the promotion of cricket and running the activities of club is secondary.

(iv) The conduct and manner in which the international cricket matches and IPL matches being new activity, held in Brabourne stadium violate the basic concept of mutuality, which the ld. AO failed to analyse. The maintenance for ground and pitches for holding the cricket matches are commercial activity. Further, the Ld. PCIT doubted that the assessee has not earned enough by holding the matches and that it should have earned more revenue. In his view, the facilities of the club has been used by the outsiders who must have earned at the expense of the assessee club. Accordingly, the ld. PCIT concluded the order is erroneous and prejudicial to the interest of the revenue.

(v) The assessee has claimed capital gains exempt under the principle of mutuality and the assessee has undertaken the investment activity in routine business manner.

3.4. The Ld. PCIT accordingly held that the assessee is not a mutual association, it is infact devoid of any mutuality by the very structure of members, their contributions by way of entrance fee and annual and local subscriptions and, the limitations on the kind of and consequently number of members entitled to surplus on dissolution. The Ld. PCIT set aside the order of assessment with a direction to Ld. AO to frame the order afresh including the finding that the assessee is not a mutual concern by its very structure of members.

On applicability of Principles of Mutuality

4. It is not in dispute that the assessee club has been held to be a mutual association for more than 4 decades in the past. It would be relevant to note that the dispute with regard to the status of the assessee as a ‘mutual association’ arose for the first time in the Asst Year 1970-71, though the order of the Tribunal for that year is not available. There is a reference to this dispute in the Tribunal Order dated 21.10.1976 for the Asst Year 1973-74 which is enclosed in the case law paper book. In the said order dated 21.10.1976 for the Asst Year 1973-74, the Tribunal was concerned with the question whether the amount received by the assessee from sale of tickets of the Test Match between England and India to its own members, was exempt on the principles of mutuality. The Tribunal followed its own order dated 17.6.1974 for the Asst Years 1970­71 and 1972-73 and by placing reliance on the decision of the Hon’ble Supreme Court in the case of CIT vs R.W.I.T.C. reported in 24 ITR 551 (SC) held that the assessee is a mutual association and the amounts received by it from its members for sale of tickets to a cricket match do not have the character of income. It was submitted by the ld. AR as a statement from the Bar, that against this order of tribunal, no appeal has been preferred by the department before the Hon’ble Bombay High Court. In our considered opinion, this judgement of tribunal assumes importance to the impugned issue, in view of the fact that in the said judgement, the tribunal had held that the assessee is a mutual association in the context of sale of tickets to members for the Test Match between England and India and the ld. PCIT is seeking to revive the same issue in the section 263 proceedings denying exemption from principles of mutuality on the ground that the assessee sold tickets to its members for an International Cricket Match and IPL Match. This is evident from para 6.3. of the order of ld. PCIT.

4.1. We find that the ld. AR before us submitted that the assessee was a party before the Hon’ble Supreme Court in CIT vs. Bankipur Club Ltd reported in 226 ITR 97 (SC). The facts of the assessee’s case relating to the Asst Years 1977-78 and 1978-79 are discussed at pages 106 and 107 of the judgement. The Hon’ble Supreme Court upheld the findings of the Tribunal and the Hon’ble High Court that the assessee is a mutual association and that the income from property let out to members is exempt from tax on the principles of mutuality. The operative portion of the judgement of Hon’ble Supreme Court in the case of Bankipur Club supra as applicable to the assessee alone are as under:-

11. C.A. Nos. 10194 of 1995 and 3382 of 1997 [arising out of SLP (C) No. 22644 of 1994] relate to the assessee, the Cricket Club of India. The proceedings relate to the assessment years 1977-78 and 1978-79. Amongst others, the Cricket Club of India was in receipt of income from property owned by it – chambers in the building of the assessee let out to members, annual value of the club house and annual value of Patiala Pavillion. The above facilities were provided only to members of the association and that too temporary accommodation. The arrangement was essentially for the benefit of the members. Following the decision rendered by the Tribunal, Bombay Bench-A, for the assessment years 1974-75 and 1976-77 rendered in IT Appeal Nos. 1730 and 1913 (Bom.) of 1980, the Tribunal held that no portion of the Club House, Patiala Pavillion, etc., is let out to strangers and that these portions are let out only to the members and so, even if any income had actually accrued due from the members on the above counts, it will not be taxable on the principle of mutuality. In the application filed under section 256(2) of the Act, the High Court declined to refer the question of law posed by the revenue, to the effect, “whether the Appellate Tribunal was justified in law in holding that the income from the property held by the assessee could not be brought to charge under the provisions of sections 22 to 26 of the Act ?” The decision was followed for the assessment year 1978-79 – C.A. No. 10194 of 1995 and the High Court declined to refer any question of law for this year as well. In fact, for both the years, the decision of the Tribunal to the effect that the income received from the aforesaid counts is exempt under the principle of mutuality, was not doubted by the High Court, holding that no referable question of law arose for its decision.

4.1.1. The said judgement of the Hon’ble Supreme Court is relevant because the Ld. PCIT has revived the same issues and denied exemption on the ground that the assessee has temporary members, the surplus may not be distributed equally on winding-up and there are taxable transactions with non-members.

4.2. In the Asst Year 2004-05, the ld. AO had reopened the assessment on the ground that certain receipts by the assessee from its members were not entitled to the benefit of mutuality. However, after considering the submissions, the ld. AO framed the assessment on 31.12.2009 categorically accepting that the amounts received from members was not taxable on the principles of mutuality.

4.3. In the Asst Year 2005-06, the Ld. CIT(A) allowed the appeal of the assessee with the following significant observations :-

“4.8. ….. The assessee club is a very old organisation which is incorporated for the benefit of its members. The issue of principle of mutuality has been considered and upheld in the appellant’s own case in the earlier years and there is no scope for any fresh debate. In addition to this, the AO has not found any facts to suggest that the club does not run under the principles of mutuality. He has assessed the receipts only on the ground that in absence of the details of the receipts, it is not possible to know whether the receipts are received from members or outsiders. This is rather a vague observation which is not supported by any fact or evidence, So, the additions need to be deleted”.

4.4. The Ld. CIT(A) has given a similar finding with regard to the addition on account of interest received from the members.

4.5. It is pertinent to note that the department has accepted the aforesaid findings of the Ld. CIT(A). Though an appeal was filed to this Tribunal on another issue, the issue of mutuality was not challenged.

4.6. The same holds good for Asst Year 2006-07. The Department accepted the ld. CIT(A)’s finding that the assessee is a mutual association and its receipts from members are exempt on the principles of mutuality.

4.7. In the Asst Years 2004-05, 2007-08 and 2008-09, the ld. AO did not dispute that the assessee is a mutual association. However, it was held that the amounts received by the assessee by way of sponsorship fee of an event conducted for the members and for supply of food to members by an outside caterer was not exempt on the principles of mutuality. Both issues were decided in favour of the assessee by this Tribunal vide its common order dated 21.3.2016 for the Asst Years 2004 05, 2007-08 and 2008-09 vide paragraphs 11, 16 and 23 of the order.

4.8. The assessee has always been treated as Mutual Association since its inception for decades upto AY 2008-09 by the department as is evident from the tabulation handed over by the ld. AR at the time of hearing. It was submitted that this has continued even in the subsequent years i.e. Assessment Year 2016-17 to 2018-19 wherein the Ld. AO in the scrutiny assessment treated the assessee as a mutual association and accordingly has accepted Principle of Mutuality in respect of majority of receipts as claimed by the assessee.

Taxability of Catering Revenue

5. With respect to the addition of ‘Catering Revenue’ which is a recurring issue, the Hon’ble Jurisdictional High Court in assessee’s own case for A.Y. 2008-09 has dismissed the revenue’s appeal against the order of this Tribunal in Income Tax Appeal No. 653 of 2017 dated 6.6.2019. The relevant question raised before the Hon’ble Bombay High Court is as under:-

(iii) Whether on the facts and circumstances of the case and in law, the Tribunal was correct in upholding the order of CIT(A) in deleting the addition of Rs 9,20,825/- made on account of club share income of assessee from caterer, on the ground that the same was exempt under principle of mutuality?

The Hon’ble Bombay High Court disposed of this question by observing as under:-

5. Last surviving question pertains to an addition of Rs 9.20 lakhs made by the Assessing Officer on the ground that the said sum was received by the assessee from the caterer whose services the assessee-club has availed to provide catering services to the club members. The Commissioner of Income Tax, however, while deleting such disallowance came to the conclusion that the club had collected money from the members for food and refreshment out of which a sum of Rs 9.20 lakhs was retained while releasing the payment in favour of the caterer. This was, thus, a sum collected from the members on the principle of mutuality. This amount was, therefore, not taxed.

6. It may be seen that while making payment to the caterer from the amount collected from the members, the club had retained a small portion to meet with its administrative expenses. We find no error in the view of the Commissioner as upheld by the Tribunal.

5.1. Thus, the Hon’ble Bombay High Court has affirmed the finding of this Tribunal in allowing ‘Catering Revenue’ as income exempt from tax under the principle of Mutuality. Hence, the said issue of applicability of mutuality principle is further covered/ settled in favour of assessee. Hence the observation made by the ld. PCIT in this regard is totally untenable in the eyes of law.

5.2. We find that the ld. AR placed on record before us the copy of assessment orders for the Asst Years 2016-17, 2017-18 and 2018-19 together with the computation of total income and ITR acknowledgement for the relevant years at the time of hearing. The assessment for the Asst Year 2016-17 was completed u/s 143(3) of the Act on 22.12.2018 wherein the ld. AO has not denied the assessee’s claim for exemption under the Principles of Mutuality in respect of various receipts from members except ‘Catering Revenue’. We find that the assessments for the Asst Years 2017-18 and 2018-19 were completed in similar fashion u/s 143(3) of the Act vide separate orders dated 22.12.2019 and 24.2.2021 respectively.

5.3. Hence we find that even on the principles of consistency and there being no change in facts, the order of Ld. Pr. CIT is bad in law. Reliance in this regard is placed on the following decisions :-

a) Decision of Hon’ble Supreme Court in the case of Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC) wherein it was held as under:-

16. We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

b) Decision of Hon’ble Supreme Court in the case of BSNL vs Union o f India reported in 282 ITR 273 (SC) wherein it was held as under:-

20. The decisions cited have uniformly held that res judicata does not apply in matters pertaining to tax for different assessment years because res judicata applies to debar Courts from entertaining issues on the same cause of action whereas the cause of action for each assessment year is distinct.

The Courts will generally adopt an earlier pronouncement of the law or a conclusion of fact unless there is a new ground urged or a material change in the factual position. The reason why Courts have held parties to the opinion expressed in a decision in one assessment year to the same opinion in a subsequent year is not because of any principle of res judicata but because of the theory of precedent or the precedential value of the earlier pronouncement. Where facts and law in a subsequent assessment year are the same, no authority whether quasi-judicial or judicial can generally be permitted to take a different view. This mandate is subject only to the usual gateways of distinguishing the earlier decision or where the earlier decision is per incuriam. However, these are fetters only on a coordinate Bench which, failing the possibility of availing of either of these gateways, may yet differ with the view expressed and refer the matter to a Bench of superior strength or in some cases to a Bench of superior jurisdiction”. [Emphasis supplied]

c) Decision of Hon’ble Delhi High Court in the case of CIT vs Escorts Ltd reported in 338 ITR 435 (Del), wherein by applying the principle of consistency , it was held that when the fundamental nature of a transaction, which was examined year after year, had remained the same, the ld. CIT was not entitled to pass a revision order u/s 263 of the Act and take a different view.

d) Decision of Hon’ble Delhi High Court in the case of CIT vs Neo Poly Pack (P) Ltd reported in 245 ITR 492 (Del)

e) Decision of Hon’ble Jurisdictional High Court in the case of PCIT vs Quest Investment Advisors Pvt Ltd reported in 96 com 157 (Bom)

Revenue from holding Cricket Matches

6. With respect to revenue earned from holding cricket matches for which adverse observations were made by the ld. PCIT in his section 263 order is concerned, we find that in assessee’s own case, the aspect of holding cricket matches have also been examined earlier by Hon’ble Supreme Court in Cricket Club of India vs Bombay Labour Union and another AIR 1969 SUPREME COURT 276 dated 7.8.1968, wherein the Hon’ble Supreme Court have categorically rejected the submission of workmen that this activity by the Club is an undertaking in the nature of trade or business. The Hon’ble Supreme Court held that it is, in fact, an activity in the course of promotion of the game of cricket and it is incidental that the Club is able to make an income on these few occasions which income is later utilized for the purpose of fulfilling its other objects as incorporated in the Memorandum of Association. The holding of the Test Matches is primarily organized by the Club for the purpose of promoting the game of cricket. Accordingly, the Hon’ble Supreme Court held that this activity by the Club cannot, by itself lead to the inference that the Club is carrying on an industry. For the sake of convenience, the said judgement is reproduced hereunder:-

1. ……………………

2. The Club is admittedly a Members’ Club and is not a proprietary Club, though it is incorporated as a Company under the Indian Companies Act. At the relevant time, the Club had a membership of about 4800 and was employing 397 employees who claimed to be workmen. The principal objects of the Club are to encourage and promote various sports, particularly the game of cricket in India and elsewhere, to lay out grounds for the game of cricket, and also to finance and assist in financing cricket matches and tournaments. In addition, it provides avenue for sports and games as well as facilities for recreation and entertainment for the Members. It maintains Tennis Courts in pursuance of another outdoor activity. The indoor games for which provision is made include Billiards, Table Tennis, Badminton and Squash. It also maintains a swimming pool. The Club has also provision for residence of members, for which purpose it has constructed 48 residential flats and 40 residential rooms, some of which are air- conditioned. Persons occupying these residential flats and rooms are charged at different rates according to the accommodation provided. There is also a Catering Department which provides food and refreshments for the members coming to the Club as well as those residing in the residential portion, and it also makes arrangements for dinners and parties on special occasions at the request of Members. The affairs of the Club are managed by an Executive Committee and various honorary office bearers.

3. As is usual in most Clubs, the membership is varied. There are life members, ordinary members, temporary members, service members and honorary members. Guests, both local and from outstation, are admitted, but subject to certain restrictions and only when they are introduced by a member. The Club owns immovable properties of the value of about Rs. 67 lakhs from which an income in the range of about Rs. 4 lakhs a year accrues, to the Club. The other regular source of income is the subscription’ paid by each member. Entrance paid by the Members is treated as a contribution to the capital of the Club. There are regular games for members of the Club; but, apart from those games, in the cricket ground, which has a Stadium attached to it, matches and various tournaments are held, including Test Matches between the Indian teams and foreign teams visiting India. On these occasions, public are admitted to watch the matches on tickets sold by the Club. In addition, it appears that four sports organisations, amongst which mention may be made particularly of the Catholic Gymkhana Ltd., have been given the right, under agreements entered into with the Club, to exclusive use of a number of seats in the Stadium whenever there are official and/or unofficial test matches and/or matches of similar status sponsored by the Board of Control for Cricket in India, or when a fixture is played by a foreign team on the Club grounds, though not sponsored by the Board. Under these agreements, these organisations make payment to the Club for the members’ seats reserved at prescribed rates and they are at liberty to charge whatever they like from their own members who are admitted to those seats, with the further facility that they can make their own provision for catering and supply of refreshments to their members over part of the land made available to them by the Club. On the occasion. of annual Badminton and Table Tennis open tournaments, a stall is run by the Club where both competitors and spectators are allowed to buy snacks and soft drinks at concessional rates. In the Catering Department alone, the turnover of the Club is in the region of Rs. 10 lakhs a year. The Tribunal, after considering these facts and the various decisions which were available to when it gave its award, has come to the conclusion that the Club is an ‘industry’, so that this reference under the Act is competent. The Club, which has come up in appeal, contends that the decision of the Tribunal is not correct and that, on the ratio of the decision of this Court in The Secretary Madras Gymkhana Club Employees’ Union v. The Management of the Gymkhana Club(1), this Court should hold that the Club is not an industry.

4. Our task for the decision of this case has been simplified, because this Court, in the case of Madras Gymkhana Club(1), has clearly laid down the principles of law which have to be applied in determining when a Club can be held to be an industry. In that case, the entire previous case-law relating to various institutions was fully discussed. After that discussion, the conclusion of the Court was mainly expressed in the following words :–

“The principles so far settled come to this. Every human activity in which enters the relationship of employers and employees, is not necessarily creative of an industry. Personal services rendered by domestic and other servants, administrative services of public officials, service in aid of occupations of professional men, such as doctors and lawyers, etc., employment of teachers and so on may result in relationship in which there are employers on the one side and employees on the other, but they must be excluded because they do not come within the denotation of the term “industry”. Primarily, therefore, industrial disputes occur when the operation undertaken rests upon cooperation between employers and employees with a view to production and distribution of material goods, in other words, wealth, but they may arise also in cases where the co­operation is to produce material services. The normal cases are those in which the production or distribution is of material goods or wealth and they will fall within the expression ‘trade, business and manufacture'”

Further, it was held that :–

“before the work engaged in can be described as an industry, it must bear the definite character of ‘trade’ or ‘business’ or ‘manufacture’ or ‘calling’ or must be capable of being described as an undertaking in material goods or material services. Now, in the application of the Act, the undertaking may be an enterprise of a private individual or individuals. On the other hand, it may not. It is not necessary that the employer must always be a private individual who carries on the operation with his own capital and with a view to his own profit. The Act in terms contemplates cases of industrial disputes where the Government or a local authority or a public utility service may be the employer.”

Dealing with the scope of the word “undertaking” , it was held that :-

“the word ^„undertaking‟ must be defined as any business or any work or project which one engages in or attempts as an enterprise analogous to business or trade.”

Further essential features were indicated by laying down that :-

“where the activity is to be considered as an industry, it must not be casual but must be distinctly systematic. The work for which labour of workmen is required, must be productive and the workmen must be following an employment, calling or industrial avocation. The salient fact in this context is that the workmen axe not their own masters but render service at the behest of masters. This follows from the second part of the definition of industry. Then again when private individuals are the employers, the industry is run with capital and with a view to profits. These two circumstances may not exist when Government or a local authority enter upon business, trade, manufacture or an undertaking analogous to trade.”

It was also decided by the Court that if a Club is a member’s selfserving institution, it cannot be held to be an industry. These are the main principles which have to be kept in view in arriving at the decision whether the Club is an industry or not.

5. The principal argument of Mr. Vimadalal, learned counsel for the Club, was that there is a basic and overall similarity between the Club and the Madras Gymkhana Club, so that the decision of this Court in the case of the latter is fully applicable. It was pointed out that both Clubs are Members’ Clubs and not proprietary Clubs. The primary objects of both the Clubs are to provide venues for sports and games and facilities for recreation and entertainment of Members and guests introduced by Members. Both Clubs are sports, social and recreational Clubs. Grounds are maintained by both Clubs for promotion of sports, with the slight difference that, while in the Madras Gymkhana Club the outdoor games promoted are Golf, Rugby, Foot-ball and Tennis, in the Club the two outdoor games on which the Club concentrates are Cricket and Tennis. Both have indoor games, while the Club in addition, maintains a Swimming Pool for the Members. Both Clubs run tournaments and matches for the benefit of members and open tournaments are held for exhibition to members as well as non-members. Both Clubs are maintaining Catering Departments for the entertainment of members and their guests. In both Clubs guests are allowed only when introduced by members. The annual turnover in both Clubs in the Catering Department is in the region of about Rs. 9 to 10 lakhs. Residential accommodation is maintained in both Clubs and is open only to Members. Both Clubs have capital investments from which income accrues to them, though the scale of investments by the Madras Gymkhana Club is much smaller inasmuch as its total investment is of the region of Rs. 4 1/2 lakhs, while the Club has investment of immovable property to the tune of about Rs. 67 lakhs. In both Clubs, admission to outsiders is restricted in similar manner. The management in both cases is by Committees elected by Members and annual accounts are made up, audited and laid before and adopted at the annual general meetings. Even in other respects, such as in the matter of admission of Members, relations between members, inter se, convening of meetings, and expulsion of members, the rules are similar. In neither of the two Clubs are profits distributed between members. It was, thus, urged that there is, in fact, no substantial difference between the nature of the Club and the Madras Gymkhana Club and, consequently, it should be held that this Club is not an industry. It was further urged that a few minor differences will not alter the legal inference and will not make the ratio of the Madras Gymkhana Club(1) case inapplicable.

6. S.B. Naik, counsel appearing for the Union, however, urged that the differences that exist are not minor and they are such as should lead to the inference that this Club carries on its activities in such a manner that it must be held to be an ‘industry’ as explained in the Madras Gymkhana Club(1) case.

7. The first point urged before us was that an examination of the objects of the Club would show that it is not purely a social or recreational Club confining its activities to Members like the Madras Gymkhana Club. Our attention was drawn to objects of the Club as given in paragraph 3, clauses (a), (c), (d), (g), (1) and (na) of the Memorandum of Association of the Club. It was argued that the activity of encouraging and promoting the game of cricket in India and elsewhere mentioned in Clause (a), financing and assisting in financing visits of foreign teams and of visits of Indian teams to foreign countries in cl. (c), organising and promoting or assisting in the organisation or promotion of Provincial Cricket Associations and Inter-Provincial Tournaments in el. (d), buying, repairing, making, supplying, selling and dealing in all kinds of apparatus and appliances and all kinds off provisions, liquid and solid, required by persons frequenting the Club buildings or the cricket grounds or other premises of the Club in clause (g) and paying all or any part of the experts of any cricket match, tour or tournament, or any other sporting events or match or competition in any other form of game, athletics, or sport and any kind of entertainment, exhibition or display in clause (1 ), are not activities which should form part of a social and recreational Club. The argument ignores the fact that the Club is not only a social and recreational Club, but is a Club of Members organised with one of ‘the primary objects of encouraging and promoting sports and games. The activity of promotion of sports and games by a set of people combining together to form a Club cannot be said to be an undertaking in the nature of a trade or business in which material goods or material services are provided with the aid of the employees. In clause (na), the object mentioned is to construct on any premises of the Club buildings of any kind for residential, commercial, sporting or other uses and to repair, or alter or pull down, or demolish the same. In this clause, emphasis was laid on the word “commercial” and it was urged that, if buildings are constructed for commercial purposes, this object will make the Club an ‘industry’. We do not consider it necessary to deal with this point at this stage, because the very next point relating to investment of large sums of money in immovable properties indicates how this object is being carried out in practice and, when dealing with this point, we shall indicate that this activity ‘is not of such a nature as to make the Club an industry’.

8. We have already mentioned earlier that the Club has acquired immovable properties of the value of about Rs. 67 lakhs. Some of these properties consist of buildings which are being used by the Members of the Club. These are the main Club building and the residential flats and rooms. In addition, there is a Stadium that is used on occasions when Cricket Matches are held on the grounds maintained by the Club. Apart from all these, there are a certain number of buildings just outside the Stadium which are let out for use as shops and offices by business concerns. The income that the Club earns is primarily from these last-mentioned constructions. It was urged that the Club in thus constructing building for the purpose of earning income from rents payable b.y business concerns, to whom those premises ‘are let out, is carrying on an activity which is in the nature of trade or business and, consequently, it should be held that the Club is an industry. The Tribunal accepted this submission and held :-

“A company which has as its business acquiring of immovable properties on a large scale and for making profit out of the rents thereof would come within the definition of ‘industry’. The properties of the C.C.I. which are let out, viz. 48 residential f1flats, 40 ordinary and air-conditioned rooms; and the premises let to shops and offices form a very large group of properties; the management of them as well as the earnings from them, particularly in the case of the rooms which are let out with compulsory boarding require co-operation between capital and labour.”

In examining this aspect, the Tribunal a ears to have fallen into an error in ignoring the circumstance that the income, which earned by the Club from investment on these immovable properties, cannot be held to be income that accrues to it with the aid and co-operation of the employees. The material on the record shows that, out of 397 employees, only 14 attend the three immovable properties consisting of the Club Chambers, North Stand Building, and Stadium House. It may be presumed that the buildings which are let out for use as shops and offices are part of the Stadium House; but there ‘is nothing to show how many of these employees are employed in the work connected with these buildings. In fact, on the face of it, it would appear that, once those buildings have been let out to other persons for use as shops and offices, there would be no need at all for the Club to maintain an employee-staff in order to look after those buildings, so that it is likely that all the 14 employees, who, it is admitted, attend the immovable properties, must be doing so primarily in order to look after the Club buildings and the residential accommodation. It has already been mentioned earlier that the income which the Club ‘is earning from these immovable properties is primarily from the buildings let out for use as shops and offices and that income, the circumstances, cannot be held to have been earned as a result of any co-operation between the Club and its employees. In earning this income, the Club is not carrying on an activity as a result of which material goods or material services are produced with the co-operation of employees.

9. So far as the residential buildings are concerned, where it appears that some employees must be contributing their labour, the principal consideration for holding that it does not amount to an activity of the nature of an industry is that this residential accommodation is provided exclusively for the Members of the Club. It has been stated that it is meant primarily for outstation Members of the Club who occupy this residential accommodation when they visit Bombay. In addition, it seems that there are 11 Members of the Club who are residing more or less permanently in 11 of these residential rooms. It is also true that members occupying the residential accommodation are required to take advantage of the catering facilities provided by the Club. They are charged consolidated amounts for occupation of the rooms as well as for the food served to them. The Tribunal has held that this activity is in the nature of keeping a Hotel. The view taken by the Tribunal is clearly incorrect, because it ignores the circumstance that this facility is available only to Members of the Club and to no outsider. It is in the nature of a self-service by the Club organised for its Members. The rules which have been brought to our notice make it clear that, apart from Members, no one is allowed to stay in these residential rooms and that, in exceptional cases where some important visitors come to the Club or competitors taking part in tournaments visit this place, they are permitted to stay in these residential rooms, but, in such cases, they are all made Honorary Members of the Club. The facility is thus availed of by them in the capacity of Members of the Club, even though that membership is honorary. The principle of having honorary members is quite common to most Clubs and existed even in the Madras Gymkhana Club. Once a person becomes an honorary member, provision of facilities of the Club for him partakes of the same nature as for other members and, consequently, such an activity by the Club continues to remain a part of it as a self-serving institution. It is quite wrong to equate it with the activity of a Hotel. It may also be mentioned that there is definite evidence given on behalf of the Club that the charges for the residential accommodation with catering are much lower in the Club than the charges made for similar facility in any decent Hotel in Bombay where comparable accommodation may be provided. This further clarifies the position that this is a facility provided by the Club at concessional rates exclusively for its Members.

10. We may at this stage also deal with the argument advanced on behalf of the Union in respect of the nature of catering activities of the Club. So far as the catering in the Refreshment Room maintained by the Club and for persons occupying the residential accommodation is concerned, it is confined to Members of the Club only. No outsider is allowed to take advantage of this facility. In fact, the bye-laws of the Club clearly lay down that, even if a guest is introduced by a Member, the guest is not entitled to pay for any refreshment served to him. The transaction continues to be confined to the Member of the Club who introduces the guest. The Club is, of course, not open to public in general and, even when non-members are admitted in the Club, they are only allowed as guests of members with certain restrictions. Such guests cannot enter into any transaction with the Catering Department of the Club. Consequently, this catering activity is also in the nature of a self-service by the Club for its members.

11. In connection with this activity of catering, reliance was, however, placed by the respondent Union on two aspects.- One is that it has been admitted that, on occasions when Badminton and Table Tennis open tournaments are held, a stall ‘is kept by the Club where, apart from Members, competitors and spectators can also buy snacks and soft drinks; and it was urged that this sale of snacks and soft drinks to non,- members is clearly an activity in the nature of business or trade. It appears, however, that these stalls are opened as a rare feature only on occasions when annual Badminton and Table Tennis open tournaments’ are held. We have been informed that there is only one Badminton and one Table Tennis open tournament every year, so that these stalls are run only twice a year. Further, there is a clear Statement that the snacks and soft drinks are provided to competitors and spectators at concessional rates. This indicates. that the provision of these stalls is not for the purpose of carrying on an activity of selling snacks and soft drinks to outsiders, but is really intended as provision of a facility to persons participating in or coming to watch the tournament in order that the tournaments may be run successfully. These stalls are thus brought into existence as a part of the activity of promotion of games and is not a systematic activity for the purpose of carrying on transactions of sale of snacks and soft drinks to outsiders. The opening of stalls on two such occasions in a year with this limited object cannot be held to be an under- taking of the nature of business or trade.

12. It was then pointed out that there have been occasions when very big parties have been held in this Club where catering has been provided by the Club and, at these parties, non- members have attended in large numbers. On behalf of the respondent Union, an example was cited of an occasion when a function was held to celebrate the Golden Jubilee of the Bank of India and catering was provided for a large number of guests at the Club. In answer to interrogatories served by the workmen, it was admitted by the Secretary of the Club that there was also another function of celebration of the silver Jubilee of the Bombay Mercantile Co-operative Bank Ltd. when also catering was provided by the Club. It was stated on behalf of the workmen that, on these occasions, the invitations were issued not in the name of any Member of the Club, but in the name of the organisations which held the functions. The affidavit filed by the Secretary of the Club, however, shows that in these two cases or in other cases where parties or functions are held in the Club, the Club never enters into any contract with any outsider. The Club, in fact. provides the catering at the instance of a Member of the Club. It appears that some Members of the Club are connected with organisations like the Bank of India or the Bombay Mercantile Co-operative Bank Ltd., and they adopted ‘the course of arranging the function with the Club in their capacity as Members. The privity of contract was between them and the Club, and the Club itself had nothing to do with the two organisations. May be that, in arranging such functions, the Members of the Club, to some extent, abused their privilege of having functions arranged by the Club, but it cannot be held that the Club, in agreeing to cater at such functions, was really intending to sell its goods to persons other than Members. The Club, in fact, realised the dues for such functions from the Members only. The Members were responsible for payment to the Club and did, in fact, make the payments. The Club, in thus catering for such functions, was in fact catering for its Members and was not at all intending to carry on an activity of providing the facility of catering at the instance of outsiders. On behalf of the workmen, it was urged that functions of this nature are numerous and a regular feature in this Club. In fact, the Tribunal in its order has held that :–

“a systematic arrangement by which Companies and other institutions book the grounds through members, whereby the Club makes profit by charging refreshments per head would bring a Club on the other side of the border line so as to make it an industry.”

In accepting this view, the Tribunal again fell into an error for’ two reasons. The first was that the Tribunal did not attach due importance to the circumstances that the functions were arranged by the Club only because of the request of a Member and the Club confined its contract with the Member without in any way dealing with outside organisations. The second point is that there was no material to show that such functions form a systematic arrangement. In fact, only two instances were put forward on behalf of the workmen where functions were arranged for purposes of celebrating the Jubilee functions of two Banks. Further, the affidavit of K.K. Tarapor filed on behalf of the Club shows that, during the four years 1961-62, 1962-63, 1963-64 and 1964-65, the total number of functions at which the attendance was 800 and more, including Members of the Club, was 28. We were told that the Tribunal had asked for the figures of functions held during these four years at which the attendance was 800 or more, and, thereupon, this information was supplied in the affidavit of Tarapur. There is no material to show how many of these 28 functions were of the nature of the two functions held for celebration of Jubilees of the two Banks. It is quite likely that a large number of these parties at which the attendance was 800 or more may have been given personally by Members of the Club on their own account in order to entertain people for their own personal celebrations on occasions such as marriages of sons or daughters. In fact, the evidence given before the Tribunal was limited to only two specific instances where functions were held for celebration by organisations and. not by Members of the Club themselves. In the absence of any material showing that a large number of parties were of that nature, no inference could follow that this was a systematic arrangement by which the Club was attempting to make profit; and the Tribunal, in phasing its decision on this ground, was not correct. The few instances cited do not, in our opinion, indicate that the Club is carrying on this activity in such a manner that it must be held to be an industry.

13. Very great reliance was placed in support of the decision of the Tribunal on the fact that the Club has erected a Stadium at the Cricket field where matches are held and makes an income of about Rs. 2 lakhs on each occasion when a Test Match is held on the Cricket ground by charging for admission tickets sold to persons who come as spectators to watch the Test Matches. It was further pointed out that, apart from charging for admission to the Stadium from spectators by selling tickets to them, the Club has also entered into agreements with four organisations under which a number of seats in ‘the Stadium are given exclusively for the use of those organisations. We have already had occasion to mention earlier one such organisation, viz., the Catholic Gymkhana Ltd. The nature of these agreements is clear from the copy of the Agreement filed before the Tribunal which was entered into between the Club and the Catholic Gymkhana Ltd. Under that Agreement, the Club allotted for seating accommodation to the Gymkhana 831 seats in ,the North Stand for a period of 12 years. The allotment was for use by ‘the Gymkhana on all occasions when official and/or unofficial Test Matches and/or matches of similar status sponsored by the Board of Control for Cricket in India were held, or a fixture played by a foreign touring team not sponsored by the said Board. Under the Agreement, the Gymkhana had to pay Rs. 5/- per seat for the first fixture; Rs. 5 per seat for the second fixture; Rs. 4 per seat for the third fixture and Rs. 4/- per seat for ‘the fourth fixture. The question that arises is whether these charges made by the Club from these organisations, like the Catholic Gymkhana Ltd., or from spectators to whom tickets are sold, bring into existence an activity of the nature of business or trade so as to convert it into an industry. It is to be noted that one of ‘the principal objects of the Club is the promotion of the game of cricket. In fact, the very first object mentioned in the Memorandum of Association is ‘to encourage and promote the game of cricket in India and elsewhere. The second object is of laying down grounds for playing the game of cricket, and the third object ‘is clearly for the purpose of encouraging matches between Indian and foreign teams. It is clear that the Cricket grounds are being maintained by the Club in pursuance of these objectives. The game of cricket can only be promoted and encouraged if, when matches are held, facilities are provided not merely for holding the matches, but also for people to watch the matches and to create interest in the public in general in the game of cricket. It was obviously with this object that the Stadium was constructed. Its use by spectators interested in the matches or by members of other organisations interested in the game of cricket is purely for the purpose of encouraging and promoting the game of cricket in pursuance of that primary object of forming the Club. It is true that, in carrying on this object of the Club, the Club has been charging the spectators by selling tickets to them and also charging organisations to whom seats are specially allotted. So far as seats allotted to those organisations are concerned, we are inclined to accept the argument advanced ‘by Mr. Vimedalal that this arrangement, instead of enuring to the benefit of the Club, in fact is to its disadvantage. We have already indicated that at least in one case of the Catholic Gymkhana Ltd., the charge that is made from the Gymkhana is at a very low rate of Rs. 5 or Rs. 4 per seat. On the face of it, if the Club was intending to make profits, it need not have given those seats to the Gymkhana and could have sold the seats to outsiders at much higher rates. The very fact that such agreements have been entered into with organisations connected with the game of cricket shows that, in entering into these agreements, the primary object of the Club was to encourage persons who are interested in the game of cricket, even though at the disadvantage of charging them at much lower rates. So far as charges from spectators are concerned by selling tickets to them, they are obviously realised in order to ensure that the Club can carry on its activity of the promotion of game of cricket and also make up losses for purposes of providing other facilities and amenities to the Members of the Club. It is to be noticed that, in the whole period of 37 years, only 13 Test Matches have been held on the grounds of the Club. Even these Matches are not organised by the Club itself. They are, in fact, organised by the Board of Control for Cricket in India. The Board then arranges with the Bombay Cricket Association, which is the controlling body, for the venue of the Test Match. The Bombay Cricket Association has no ground or Stadium of its own. It is the Bombay Cricket Association that approaches the Club to promote the Test Matches to be played at the Brabourne Stadium of the Club, and the Club accedes to these requests. It will thus be seen that the Club comes in at the last stage of providing the venue and making arrangements for the successful holding of the Test Matches and it is for that purpose, on the few occasions when Test Matches are allotted to the grounds of the Club, that the Club is able to sell tickets in the Stadium and make some income. In these circumstances, we are not inclined to accept the submission made on behalf of the workmen that this activity by the Club is an undertaking in the nature of trade or business. It is, in fact, an activity in the course of promotion of the game of cricket and it is incidental that the Club is able to make an income on these few occasions which income is later utilised for the purpose of fulfilling its other objects as incorporated in the Memorandum of Association. The holding of the Test Matches is primarily organised by the Club for the purpose of promoting the game of cricket. This activity by the Club cannot, by itself in our opinion, lead to the inference that the Club is carrying on an industry.

14. Lastly, reference was made to the circumstance that, unlike the Madras Gymkhana Club, the Club has been incorporated as a Limited Company under the Indian Companies Act. It was urged that the effect of this incorporation in law was that the Club became an entity separate and distinct from its Members, so that, in providing catering facilities, the Club, as a separate legal entity, was entering into transactions with the Members who were distinct from the Club itself. In our opinion, the Tribunal was right in holding that the circumstance of incorporation of the Club as a Limited Company is not of importance. It is true that, for purposes of contract law and for purposes of suing or being sued, the fact of incorporation makes the Club a separate legal entity; but, in deciding whether the Club is an industry or not, we cannot base our decision on such legal technicalities. What we have to see is the nature of the activity in fact and in substance. Though the Club is incorporated as a Company, it is not like an ordinary Company constituted for the purpose of carrying on business. There are no share-holders. No dividends are ever declared and no distribution of profits takes place. Admission to the Club is by payment of admission fee and not by purchase of shares. Even this admission is subject to balloting. The membership is not transferable like the right of shareholders. There is the provision for expulsion of a Member under certain circumstances which feature never exists in the case of a shareholder holding shares in a Limited Company. The membership is fluid. A person retains rights as long as he continues as a Member and gets nothing at all when he ceases to be a Member, even though he may have paid a large amount as admission fee. He even loses his rights on expulsion. In these circumstances, it is clear that the Club cannot be treated as a separate legal entity of the nature of a Limited Company carrying on business. The Club, in fact, continues to be a Members’ Club without any shareholders and, consequently, all services provided in the Club for Members have to be treated as activities of a self-serving institution.

15. For these reasons, we consider that the order made by the Tribunal, holding that ‘the Club is an ‘industry’, is incorrect and must be set aside. The appeal is allowed, and the order of the Tribunal. dismissing the preliminary objection of the Club, is set aside. In the circumstances of this case, we direct parties to bear their own costs of this appeal.

6.1. Hence, we find that the Hon’ble Supreme Court in assessee’s own case had duly considered the issue relating to holding of cricket matches and had clearly laid down that the activity of cricket cannot be held in the nature of trade or business. In any case, we find that the ld. PCIT had only stated that the assessee could have earned more revenue from holding cricket matches. This is only a mere surmise and conjecture on the part of the ld. PCIT. The law is very well settled that no proceedings could be initiated on an assessee merely on surmise and conjecture.

7. In view of the above, we hold that there is no reason for the ld. AO to take a divergent view while framing the assessment for the year under consideration. Hence we are unable to persuade ourselves to agree to the contention of the ld. PCIT that the order of the ld. AO is erroneous. Hence initiation of revision proceedings u/s 263 of the Act deserves to be quashed on this count itself as cumulative twin conditions for invoking section 263 proceedings are not satisfied in this case.

On Enhancement notice issued by ld. CIT(A) for A.Y. 2009-10 and  reliance placed by ld. PCIT in the order passed u/s 263 of the Act for A.Y. 2010-11

8. We further find that the main basis of revision proceedings u/s 263 of the Act for A.Y. 2010-11 was the Enhancement Order of A.Y. 2009-10 passed by the Ld. CIT(A). Against the said enhancement order, the assessee company had preferred an appeal before this Tribunal. With regard to the ground relating to enhancement of assessed income by ld. CIT(A) by denying the benefit of mutuality, the Tribunal in ITA No. 6937/Mum/2014 dated 4.10.2017 had set aside the matter back to the office of ld. CIT(A) for fresh adjudication after giving opportunity of being heard to the assessee.

8.1. It is pertinent to note that the ld. CIT(A) vide his order dated 29.03.2019 in the giving effect proceedings, has withdrawn the enhancement notice dated 22.08.2014 by giving the following findings:

“5.2. With reference to the above said issues pointed out in the notice of enhancement, my observations are as under:

i) I find that the appellant has rightly pointed out that the decisions regarding computation of income on commercial basis like Surat City Gymkhana vs DCIT (supra), ignoring the provisions of section 14 are all in respect of cases of Trust and not applicable to the present facts of the case where the appellant is a mutual association incorporated under the Companies Act.

ii) I find that although the appellant is registered u/s 12 A of the Act, it has not claimed exemption u/s 11 of the Act. Further, it is settled law that the provisions of section 14 are mandatory and an item of income which falls specifically under one head has to be charged under that head and none other. It was so held by the Hon’ble Calcutta High Court in CIT Vs National and Grindlays Bank Ltd. (202 ITR 559).

iii) Further, the appellant has been allowed the benefit of mutuality in respect of income received from its members and this issue was decided by the Hon’ble Supreme Court in the case of CIT vs Bankipore Club 226 ITR 97 where in it was held that there may be dealings with non-members which may give rise to taxable income but that does not affect the right to claim exemption on the principles of mutuality in respect of transactions with the members. The appellant has pointed out that in the order of ITAT Mumbai, dated 4.10.2017, for AY 2009-10, issue regarding mutuality has been accepted while deciding ground no. 2 wherein it was held that the catering revenue is an amount retained by the Club from the bills raised by the caterer and would not be taxable on the ground of mutuality (para6 & 7). Thus, I am inclined to agree with the appellant that the dealings with non-members may give rise to taxable income but that does not affect the right to claim exemption on the principles of mutuality in respect of transactions with the members.

iv) Further, I find that if the principle of mutuality is not accepted and the income is computed as per provision of section 144 of the Act and deduction is allowed for the exempt income and the subscriptions received from the members the total income would work out to be a loss figure as against the assessed income of Rs. 11,18,21,686/-.

v) The issue of Income from House property has been considered by the ITAT, Mumbai in their order dated 4.10.2017 and the matter was restored to the file of the AO as per para 11 to 15. Therefore, this issue do not require any further consideration at this stage.

5.3. In view of above discussion, I do not find merit in going ahead with the enhancement notice dated 22.08.2014 and the same is hereby withdrawn. The AO is directed to assess the total income, in light of the assessment order passed on 21.12.2011 as modified/amended in light of the directions of the ITAT Mumbai vide order dated 04.10.2017.

5.4. Grounds 7 (raised before the ITAT) consisting of ground nos 7.1 to 7.3 are alternative grounds to ground no. 6 (on the issue of enhancement). Since, the enhancement notice has been withdrawn, the other grounds regarding claim of deductions, becomes infructuous and are accordingly, not adjudicated

5.5. The set aside issues are decided and disposed off on the above terms.”

8.1.1. Thus, the ld. CIT(A) has given a finding that (i) the assessee club is eligible for exemption under the Principle of Mutuality which shall not be affected by dealings with non-members, (ii) income of the assessee club is to be determined according to the provisions of section 14 of the Act. (iii) Alternatively, a finding is also given if the principle of mutuality is denied to the assessee, then its total income will work to a negative as against positive assessed income. The above findings are equally applicable for the year under consideration as there is no change in facts of the case. Infact the assessee had also duly pointed out to the ld. CIT(A) that if the assessment for the A.Y. 2010-11 is to be modified in lines with the enhancement made by the ld. CIT(A) for the A.Y. 2009-10, then it would only result in total loss, which would only be prejudicial to the interests of the revenue and advantageous to the assessee.

8.2. The ld. AR also made a statement from the Bar that the aforesaid findings of the ld. CIT(A) for the A.Y. 2009-10 in the giving effect proceedings, has attained finality, as the department has accepted the same and have not filed an appeal against the said order of CIT(A) before this tribunal.

8.3. In view of the above, the primary basis of ld. PCIT for initiating section 263 proceedings in the instant case (i.e by placing reliance on the findings given in the enhancement order of ld. CIT(A) for A.Y. 2009-10) gets completely vitiated.

Transactions with Non-Members not offered to tax according to  ld. PCIT

9. We find that the transactions of the assessee club with its non­members have been duly offered to tax by the assessee itself. But we find that the ld. PCIT had proceeded with the revision proceedings u/s 263 of the Act on the premise that the same is not offered to tax. We have gone through the computation of total income of the assessee for the year under consideration together with the respective returns. We find that the assessee had duly offered the interest income and capital gains to tax in the revised return of income. We find that the ld. PCIT had proceeded completely on incorrect assumption of fact. We hold that the ld. PCIT has grossly erred in stating that the transactions with non­members have not been offered to tax by the assessee. All these facts were duly brought to the knowledge of the ld. PCIT in the reply given to the show cause notice issued u/s 263 of the Act. None of the factual submissions had been considered by the ld. PCIT while passing the revision order u/s 263 of the Act. This goes to prove the complete non-application of mind on the part of the ld. PCIT in the instant case, while invoking his revisionary jurisdiction u/s 263 of the Act. Hence the order of the ld. PCIT u/s 263 of the Act deserves to be quashed on this count also in respect of this issue.

Enquiries carried out by the ld. AO in original scrutiny assessment proceedings

10. With regard to the fact as to whether the assessee is a mutual association or not ; with regard to taxability of ‘Catering Revenue’ ; allowability of expenses incurred for holding cricket matches together with its revenue ; taxability of interest income and short term capital gains u/s 111A of the Act , we find that the ld. AO had issued notice u/s 142(1) of the Act dated 8.11.2012 in the scrutiny assessment proceedings, wherein vide Point (ii), Point (vii) enclosed in Page 111 of Paper Book ; vide Question No. (iii) in Page 116 of the Paper Book ; vide Specific Query in Question No. (vi) in Page 117 of the Paper Book filed before us on the impugned issue. We find that the replies to the said questions were given by the assessee vide various letters dated 3.5.2012, 26.12.2012 and 4.3.2013. The relevant details of the said replies are enclosed in Page 119 of the Paper Book vide Point No. 5 Page 122 of the Paper Book and Paras 3&4 Pages 123 to 125 of the Paper Book ; Para 8 to 10 in Pages 126 to 128 of the Paper Book; Paras 1 to 5 Pages 129 to 130 of the Paper Book. These details were thoroughly examined and verified by the ld. AO in the scrutiny assessment proceedings itself. Infact the ld. AO had even taken a stand in paragraphs 2, 5 and 11 of the assessment order dated 30.3.2015 shows that he was satisfied that the assessee is a mutual association and is entitled to exemption on certain receipts. However, he held that certain receipts such as royalty, catering fees etc are not entitled to the principles of mutuality.

10.1. From the above facts, it could be safely concluded that the assessment order has been passed after due application of mind and after making adequate and requisite enquiries by the Ld. AO and accordingly the said order cannot be held to be erroneous and prejudicial to the interests of the Revenue only because the Ld. PCIT takes a different view of the matter. We have already held hereinabove that the view taken by the ld. PCIT is grossly incorrect on various counts. In any case, once a possible view has been taken by the ld. AO in the assessment proceedings, the same cannot be subject matter of revision by the ld. PCIT in the section 263 proceedings, merely because the ld. PCIT is of a different view on the same set of facts. Reliance in this regard is placed on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Gabriel India Ltd reported in 203 ITR 108 (Bom) which has been approved by the Hon’ble Supreme Court in Malabar Industrial Co Ltd vs. CIT reported in 243 ITR 83 (SC).

11. Ld. PCIT has directed the conduct of a roving and fishing inquiry which is not permissible in law:

The Ld. PCIT issued a letter dated 18.2.2015 by which he called for information relating to the conduct of cricket matches by the assessee. We find that this letter is not in the nature of a show-cause notice. It is merely calling for information. In the last paragraph of the said letter, the Ld. PCIT has observed as follows:

” It appears that Assessing Officer has not analyzed the revenue accruing to assessee which may become a potential reason for holding that the order of AO is erroneous and prejudicial to the interest of revenue”.

(Emphasis supplied by us)

11.1. We hold that merely calling for information to see whether there is “potential reason” to hold that assessment erroneous and prejudicial to the interest of revenue, constitutes a roving or fishing inquiry. Reliance in this regard is placed on the decision of Hon’ble Delhi High Court in the case of CIT vs. International Travel House Ltd reported in 344 ITR 554 (Del), it has been held that the PCIT is not permitted to exercise his revisional powers to conduct a roving or a fishing inquiry with a view to detecting alleged potential sources of income.

12. In view of the above elaborate observations, we hold that the ld. PCIT had grossly erred in invoking revisionary jurisdiction u/s 263 of the Act for more than one reason as detailed supra. Accordingly, the revision order passed by him u/s 263 of the Act is hereby quashed. Accordingly, the grounds raised by the assessee are allowed.

13. In the result, the appeal of the assessee is allowed.

Order pronounced on 15/07/2022 by way of proper mentioning in the notice board.