Law:

Section:

Section 4 of the Income-tax Act, 1961-Capital or revenue receipts-Assessee, a club, charging fee for life membership- Whether and to what extent such fee is income in the case of club-Held, a portion of such fee, representing entrance fee, is capital receipt; the rest, representing subscription, is income Facts The assessee, a club, charged Rs. 2,500 for life membership. The ITO split up the amount into two: Rs. 500 as the entrance fee, the same as is charged as entrance fee for ordinary membership, and Rs. 2,000 as the consolidated annual subscription. The former was held to be a capital receipt, whereas the latter was taxed as income. This treatment was confirmed by the AAC. The Tribunal, however, held that the whole of Rs. 2,500 (received for granting life membership) had to do with the status of that particular class of members and represented capital receipt in the hands of the club. On reference it was argued on behalf of the Department that in the case of life members the liability to pay subscription every year has merely been compounded by a consolidated payment but its character of income in the hands of the recipient has not changed. Held Having compared the conditions of life membership with those of ordinary membership in the light of the articles of association of the club, it would be seen that the lump sum payment of Rs. 2,500 in the case of life membership has two elements in it. A part is entrance fee and the other part is consolidated commuted payment in lieu of annual subscriptions. The element of entrance fee which in this case has to be computed at Rs. 500 to maintain parity with ordinary members, is a return for vesting a right of membership and is clearly in the nature of a capital receipt. The other element, amounting to Rs. 2,000 in each case, is the consolidation of a revenue receipt, and is taxable as income. The same principle would apply in the case of widows of life members who can step into the shoes of their husbands by paying Rs. 500, of which only Rs. 150 should represent the entrance fee, and Rs. 350 a capital receipt in the hands of the club. Case review CIT v. Panbari Tea Co. Ltd. [1965] 57 ITR 422 (SC), Durga Das Khanna v.…

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