Law: Income Tax Act, 1922

Section:

Income-tax----Income---Mutual concern---General principles---Excess over expenditure received by club from facilities extended to members as part of advantages attached to such membership---Not taxable as income. Under the Income-tax Act, what is taxed is, the "income, profits or gains" earned or "arising", "accruing" to a "person". Where a number of persons combine together and contribute to common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax. Where the trade or activity is mutual, the fact that as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise. The decisions of the Supreme Court in CIT v. Royal Western India Turf Club Ltd. (1953) 24 ITR 551; CIT v. Kumbakonam Mutual Benefit Fund Ltd. (1964) 53 1TR 241 and Fletcher (on his own behalf and on behalf of Trustees and Committee of Doctor's Cave Bathing Club) v. I.T.C. (1971) 3 All ER 1185 (PC) lay down the broad proposition that, if the object of the assessee-company claiming to be a "mutual concern" or "club", is to carry on a particular business and money is realised both from the members and from non-members, for the same consideration by' giving the same or similar facilities to all alike in respect of the one and the same business carried on by it, the dealings as a whole, disclose the same profit-earning motive and are alike tainted with commerciality. In other words, the activity carried on by the assessee in such cases, claiming to be a "mutual concern" or "members' club" is a trade or an adventure in the nature of trade and the transactions entered into with the members or non-members alike is a trade/business/transaction and the resultant…

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