Commissioner Of Income-Tax Bombay City vs Royal Western India Turf Club Ltd

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Civil Appeal No. 165 of 1951

Decision Date: 26 October, 1953

Coram: M. Patanjali Sastri, Vivian Bose, Ghulam Hasan, Natwarlal H. Bhagwati

In this matter the Supreme Court of India examined an appeal filed by the Commissioner of Income-Tax, Bombay City, against the Royal Western India Turf Club Ltd. The judgment was rendered on 26 October 1953. The bench that heard the case consisted of Justice M. Patanjali Sastri, Justice Vivian Bose, Justice Ghulam Hasan and Justice Natwarlal H. Bhagwati. The petitioner was the Commissioner of Income-Tax, Bombay City, and the respondent was the Royal Western India Turf Club Ltd. The reported citation for the decision is 1954 AIR 85 and 1954 SCR 289, with further citator references noted.

The assessee, Royal Western India Turf Club Ltd., was incorporated, inter alia, for the purpose of carrying on the business of a race-course company in all its branches and for establishing clubs, hotels and other conveniences connected with the property of the company. The club maintained two distinct classes of members. The first class, referred to as club members, was limited to a maximum of three hundred and fifty individuals and was elected by ballot. The second class, known as stand members, was also elected by ballot. Each member was required to pay an entry fee as well as an annual subscription. The members’ liability was limited to a guarantee, and any surplus that might remain upon winding up of the company was to be distributed equally among the members.

Admission fees were imposed on members for entry into the Members’ Enclosure and on non-members for entry into the other enclosures. Within each enclosure a totalisator was operated. The monies received from both members and non-members were placed into a single pool and the proceeds were distributed among the holders of the winning tickets. In addition, refreshments were made available in each enclosure against payment. The company acknowledged that the monies realised from non-members constituted receipts derived from its business and were therefore taxable. However, it contended that four specific categories of receipts received from members should not be assessable to income tax. These categories were: (1) season admission tickets issued to members; (2) daily admission gate tickets issued to members; (3) the use of private boxes by members; and (4) income arising from entries and forfeits received from members whose horses did not run.

The High Court of Bombay examined the contention and held that the first three items – season admission tickets, daily admission gate tickets and the use of private boxes – did not fall within the ambit of either section 10(1) or section 10(6) of the Income-Tax Act and consequently were not taxable. In contrast, the Court found that the fourth item – income from entries and forfeits of members whose horses failed to run – did fall within both section 10(1) and section 10(6) and therefore was taxable. Dissatisfied with this outcome, the Commissioner of Income-Tax appealed the decision.

The Supreme Court, upon hearing the appeal, held several points. First, it observed that the principles laid down in the Styles case, as explained in subsequent judgments, were inapplicable to the present company because there was no mutual dealing among the members in the nature of mutual insurance. There was no contribution by members to a common fund intended for the payment of liabilities undertaken by each contributor to the others, nor was there any refund of surplus to the contributors. Nevertheless, the Court noted that the company realised receipts from both members and non-members for the identical consideration of providing the same or similar facilities to all alike in the course of one and the same business carried on by the entity. This observation formed part of the Court’s reasoning in rejecting the claim that the receipts from members were exempt from tax.

In this case the Court observed that the company received money from both members and non-members for the same consideration, namely by providing the same or similar facilities to all persons alike in the course of a single business carried on by it. The Court further noted that because the company was created to carry on a business, it dealt with its members in the ordinary course of that business and offered the same or similar amenities to members and non-members. There was no mutual dealing among members nor any common fund for discharging obligations among them. The Court emphasized that the receipt of money was linked to the provision of facilities rather than to any insurance-type arrangement among members, and therefore the principle that the surplus of contributions made by members of a club for obtaining amenities could be treated specially did not apply to the present case. The Court also explained that a “trade association” means an association of tradesmen, businessmen or manufacturers formed for their common protection and advancement, and therefore the assessee could not be characterised as a “trade or similar association” within section 10(6) of the Income-Tax Act. Consequently, the company’s receipts were ordinary business income, not contributions to a common fund, and were subject to tax.

The Court then held that each of the four items of receipts received from members – admission tickets for a season, daily admission gate tickets, use of private boxes and income from entries and forfeits of members whose horses did not run – were received by the company as part of the business it carried on with its members, which fell within the meaning of section 10(1). None of those receipts were received as a trade, professional or similar association within the meaning of section 10(6). Accordingly, all the items were assessable to income tax. The judgment referred to a number of earlier decisions for support, including New York Life Insurance Co. v. Styles (Surveyor of Taxes) (1889) 14 App. Cas. 381; The Cornish Mutual Assurance Co. Ltd. v. The Commissioners of Inland Revenue L.R. [1926] A.C. 281; Jones v. South Wales Lancashire Coal Owners’ Association Ltd. L.R. [1927] A.C. 827; Municipal Mutual Insurance Co. Ltd. v. Hills (1932) 16 Tax Cas. 430; English & Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax, Assam [1948] A.C. 405; Carlisle and Silhoth of Golf Club v. Smith [1913] L.R. 3 K.B. 75; Royal Calcutta Turf Club v. Secretary of State (1921) I.L.R. 48 Cal. 844; United Services Club, Simla v. The Crown (1921) I.L.R. 2 Lah 109; Eccentric Club Case [1924] L.R. 1 K.B. 390; Dibrugarh District Club Ltd. v. Commissioner of Income-tax, Assam (1927) I.L.R. 55 Cal. 971; The Maharaj Bag Club Ltd. v. Commissioner of Income-tax, C.P. & Berar (1931) 5 I.T.C. 201; Commissioners of Inland Revenue v. Stonehaven Recreation Ground Trustees (1929) 15 Tax Cas. 419; The National Association of Local Government Officers v. Watkins (1934) 18 Tax Cas. 499; Commissioner of Income-tax, Bombay v. Karachi Chamber of Commerce [1940] I.L.R. Kar. 140; and Commissioner of Income-tax, Bombay v. Karachi Indian Merchants Association A.I.R. 1939 Sind 56. The judgment formed part of Civil Appeal No. 165 of 1951, which was heard in the Civil Appellate Jurisdiction after special leave was granted by the Supreme Court on 27 March 1951, reviewing the order dated 22 March 1950 of the High Court of Judicature at Bombay.

In 1947 the Commissioner of Income-tax was represented by M C Setalvad, Attorney-General for India, assisted by G N Joshi, while the respondent was represented by B J M Mackenna, assisted by P N Mehta. The judgment under consideration was delivered on 26 October 1953 by Justice Das, whose written opinion recorded that the present matter was an appeal filed by special leave of this Court from the judgment and order rendered by the High Court of Judicature at Bombay on 22 March 1950. That judgment had arisen from Income-tax Reference No 30 of 1947, which the Income-tax Appellate Tribunal had referred to the Court at the instance of the appellant pursuant to section 66(1) of the Income-tax Act (XI of 1922). The Court set out the factual background necessary for disposal of the appeal. The Royal Western India Turf Club Ltd., hereinafter called “the company,” had been incorporated in 1925 under the Indian Companies Act, 1913. The memorandum of association set out, among other purposes, the following objects: (a) to acquire the assets, effects and liabilities of the then unincorporated Western India Turf Club; (b) to conduct the business of a race-course company in all its branches; (c) to establish clubs, hotels and other facilities connected with the company’s property; (d) to carry on the business of hotel keepers, tavern keepers, licensed victuallers and refreshment purveyors; and (e) to sell, improve, manage, develop, lease, mortgage, dispose of or otherwise deal with any part of the company’s movable or immovable property, with a specific power to sell and distribute wines, spirits, tobacco and other stores. The liability of the members was limited by guarantee; each member undertook to contribute, in the event of winding up, an amount not exceeding one rupee toward payment of the company’s debts, liabilities and winding-up expenses. Clause 6 of the memorandum provided that, upon winding up or dissolution, any surplus property remaining after satisfaction of all debts and liabilities would be paid to or distributed equally among the members of the club. According to the articles of association applicable during the accounting year, the membership structure comprised, besides Honorary Stand Members, Visiting Members and Temporary Members, two principal categories: Club Members and Stand Members. The number of Club Members was capped at three hundred and fifty, excluding four specially designated dignitaries, while the number of Stand Members could be limited by the committee at any time. Both categories of members were elected by ballot of the committee. Upon election, each Club Member was required to pay an entrance fee of fifteen hundred rupees, whereas each Stand Member was required to pay an entrance fee of seventy-five rupees. Members of either class were also required to meet additional subscription obligations.

The members were required to pay an annual subscription of Rs 25. The whole management of the club and the control over its funds and property were placed in the hands of a committee consisting of nine club members, each elected according to the procedure laid down in the company’s articles of association. The club held the lease of two separate plots of land, one situated in Bombay and the other in Poona, and race courses had been laid out on each of those plots. On every race course three distinct enclosures were created, namely the Members’ Enclosure, the First Enclosure and the Second Enclosure, and each enclosure contained one or more stands from which the races could be viewed. The Members’ Enclosure was reserved exclusively for club members, their wives, their unmarried daughters who were older than twelve years, and the guests of those members. By contrast, the First and Second Enclosures were open to the general public. Admission to any of the three enclosures required the payment of an admission fee. Within the Members’ Enclosure, admission could be obtained either by purchasing season tickets or by buying daily gate tickets. Private boxes located in the Members’ Enclosure were made available to members on a charge that depended on the number of chairs contained in the box. In addition to the regular admission fee for the Members’ Enclosure, a member was required to pay an extra charge for each guest he brought. Each enclosure housed a totalisator operating on the parimutuel system, where persons present in that enclosure could place bets on each race. All of the totalisators were linked together by electric equipment so that the monies received from both members and non-members were pooled into a single fund and the winnings were distributed equally among the holders of the winning tickets. Refreshments were also supplied in each enclosure on the basis of payment.

The disputes that are the subject of this judgment arose from the assessment of the club’s income, profits or gains for the accounting year beginning on 1 July 1938 and ending on 30 June 1939. During that period the club received large amounts of money from admission tickets sold to members as well as to non-members, together with other receipts from various sources. The club contended that, when calculating its total income, four specific categories of receipts should be excluded. The first category consisted of season admission tickets sold to members, amounting to Rs 23,635. The second category comprised daily admission gate tickets sold to members, totalling Rs 51,777. The third category involved payments for the use of private boxes by members, which amounted to Rs 21,490. The fourth category was income derived from entries and forfeits paid by members whose horses failed to run during the season, which summed to Rs 82,490. There was no dispute regarding the liability of the club for monies received from non-members or for monies received on all other accounts. The income-tax officer held that each of the four items listed above constituted receipts from a business and therefore fell within section 10(1) of the Income-Tax Act, or alternatively, that they were receipts earned by an association for performing specific services for its members in return for remuneration clearly related to those services within the meaning of section 10(6) of the Act, and he assessed them accordingly. The club appealed this assessment, but the Appellate Assistant Commissioner dismissed the appeal, holding that…

The Tribunal had initially held that the company was engaged in a business activity and that all four of the amounts claimed by the company were receipts arising from that business within the scope of section 10(1) of the Income-Tax Act, although none of those receipts qualified under section 10(6). When the company appealed this finding before the Income-Tax Appellate Tribunal, the Appellate Tribunal reversed the earlier view and concluded that none of the sums in question could be characterised as profits or gains of a business falling within section 10(1). The Tribunal further pronounced that items 1, 2 and 3 did not fall within the ambit of section 10(6) of the Act, and it appeared not to have examined the applicability of section 10(6) to the fourth item. On the Commissioner of Income-Tax’s application, the Appellate Tribunal, invoking section 66(i) of the Act, referred two precise questions to the Bombay High Court for its opinion. The first question asked whether, on the facts found or admitted, The Royal Western India Turf Club Ltd., Bombay, had received the sums of Rs 23,635, Rs 51,777, Rs 21,490 and Rs 82,490 from a business carried on with its members within the meaning of section 10(1) of the Indian Income-Tax Act. The second question asked whether, on the same factual basis, the Club had received the sums of Rs 23,635, Rs 51,777 and Rs 21,490 – and the fourth sum of Rs 82,490, for which the Tribunal had not considered the application of section 10(6) – as a trade, professional or similar association performing services for its members for remuneration clearly related to those services within the meaning of section 10(6). When the reference was placed before the High Court for hearing, the Court found that the statement of the case supplied to it was incomplete and inadequate. Consequently, the Court remitted the reference back to the Appellate Tribunal, directing the Tribunal to furnish a proper statement of facts. The Tribunal complied by submitting a supplementary statement that set out the required facts in greater detail. Upon rehearing the reference in light of this expanded statement, the High Court held that the Club performed two distinct functions: it operated the business of horse racing and it administered the club itself. The Court observed that the first three items – Rs 23,635, Rs 51,777 and Rs 21,490 – were charges imposed on members for various amenities described in the supplementary statement, namely the use of the Members’ Enclosure upon payment of an admission fee, access to the members’ totalisator, the right to view races from the lawn or an unreserved seat in the Members’ stand, the use of a private box subject to payment, and the use of the Guest House at Poona. Accordingly the

In that case the High Court determined that the first three amounts – Rs 23,635, Rs 51,777 and Rs 21,490 – did not fall within either section 10(1) or section 10(6) of the Income-Tax Act. Regarding the sum of Rs 82,490, the Court held that it was not covered by section 10(6) but constituted a part of the income generated by the company’s horse-racing business. Consequently, the Court answered Question I in the negative with respect to the first three items and in the affirmative with respect to the fourth item, and it answered Question II in the negative for the first three items and in the affirmative for the fourth. In effect, the High Court concluded that the first three receipts were not taxable under either subsection of section 10, whereas the fourth receipt was taxable under both subsections. The Bombay High Court had dismissed the Commissioner of Income-Tax’s application under section 66-A(2) to bring the matter before this Court; the Commissioner nevertheless obtained special leave to appeal. The company did not challenge the portion of the order that declared the Rs 82,490 receipt taxable. Therefore, the matters before this Court were twofold: first, whether the initial three receipts should be regarded as income from a business carried on by the company, and second, whether those receipts arose from a trade, profession or similar association that performed specific services for its members in exchange for remuneration directly related to those services. The Court’s attention turned to the company’s memorandum of association, which listed among its objects the carrying on of a race-course business in all its branches and the operation of hotel-keeping, tavern-keeping, licensed victualling and refreshment-purveying activities. Although this detail might not be decisive, it could not be ignored and was considered a material fact. Moreover, the record showed that the company did indeed conduct a horse-racing business for non-members, and the monies received from non-members for admission to the First and Second Enclosures, for use of the totalisator and for other amenities were treated as income, profits or gains of that business. It was also noted that the daily admission fees charged to non-members for entry into the First Enclosure and the rates for railway tickets were exactly the same as those levied on members for admission to the Members’ Enclosure. Finally, the High Court’s order, now accepted by the company, affirmed that the Rs 82,490 sum derived from the horse-racing business carried on with its members fell within the meaning of section 10(1) of the Act.

The Court noted that the sum of Rs 82,490 identified as the fourth item above was derived from the horse-racing business that the company conducted with its members, within the meaning of section 10(1) of the Act. The High Court had held that this amount, which the company had received from its members, formed part of the income of the horse-racing business. The Court then asked why the first three items of receipt were not treated in the same way, that is, as parts of the income, profits or gains of that same business. It inquired on what principle or authority those three items could be excluded from the computation of the total business income of the company. In support of its claim that the three items should be exempt from tax, the company relied upon the principles laid down by the House of Lords in the well-known case of The New York Life Insurance Co. v. Styles (Surveyor of Taxes) (1). In that case the appellant was an incorporated company that issued two types of life policies, participating and non-participating. There were no shares or shareholders in the ordinary sense of the word; however, each holder of a participating policy automatically became a member of the company and was consequently entitled to a share of the assets and liable for a share of the losses. The company calculated the probable death rate among the members, estimated the expected expenses and liabilities, and then demanded premia from the members accordingly. An annual account was prepared, and the larger portion of the surplus of such premia over the expenditures related to those policies was returned to the participating policyholders, while the remainder was retained as a fund in hand for the benefit of the general body of members. The issue before the House of Lords was whether the surplus returned to the members should be assessed as taxable income, that is, as profits or gains. The majority of the Law Lords answered in the negative. The Court observed that in that case the members had joined together for the purpose of insuring each other’s lives on the principle of mutual assurance; they contributed annually to a common fund from which payments would be made, upon death, to the representatives of the deceased members. Those contributors alone owned the common fund and alone were entitled to share any surplus. Accordingly, the case was characterized as one of mutual assurance, and the individuals who were insured were the same persons who, by virtue of their contributions, were entitled to receive any surplus. The Court further noted that Lord Watson went so far as to say that the company in that case did not carry on any business at all, a statement that appeared to express a very broad view of the nature of the arrangement.

The Court observed that, although Viscount Cave later described the earlier formulation as overly broad, the noble Lords who formed the majority still held that the amounts received by the members were not profits but merely each member’s share of the excess contributions they themselves had made. This principle was applied in the decisions of The Cornish Mutual Assurance Co. Ltd. v. The Commissioners of Inland Revenue(1) and Jones v. South[1926] A.C. 281; 12 Tax Cas. 841, as well as in the case of Wales Lancashire Coal Owners’ Association Ltd.(1), all of which involved mutual assurance companies whose members’ liability was limited by guarantee and therefore required no further discussion. The ruling in the Cornish case, concerning the surplus of contributions after expenses, would have been identical to the ruling in Styles’ case (supra) had it not been for the specific provisions of section 52(2)(b), which prescribed that profit include, for mutual trading concerns, the surplus generated from transactions with members. The judgment in Jones’ case further demonstrated that the rule that the surplus could be distributed only upon winding up of the company did not alter the application of the principle established in Styles’ case (supra). The Attorney-General relied on Municipal Mutual Insurance Ltd. v. Hills(2) to illustrate the true basis for the decision in Styles’ case (supra). In that matter the appellant was an incorporated company created by representatives of several local authorities to insure fire risk on favourable terms, with effective control vested in the fire-policy holders who alone would share any surplus assets upon winding up. Over time the company expanded into extensive employers’ liability and miscellaneous insurance business. The Crown conceded that the fire-insurance activity, being a mutual business, was not taxable, while the company admitted that the employers’ liability and miscellaneous insurance carried out with outsiders were taxable. The issue before the court was whether the employers’ liability and miscellaneous insurance dealings with fire-policy holders, who were also members of the company, should also be subject to tax. Rowlatt J. held that they were taxable, a decision affirmed by the Court of Appeal and the House of Lords. The argument advanced in that case claimed that when the other party to the employers’ liability or miscellaneous insurance transaction was also a fire-policy holder, the resulting profit or surplus returned to a body of which the party was a member, thereby rendering the transaction mutual and exempt from tax under Styles’ case. Rowlatt J. rejected this argument, finding, inter alia, that there was no distinction whatsoever between amounts derived from a member in respect of non-fire business and those derived from a non-member in respect of non-fire business, because for that business the member acted as a stranger. Consequently, there was no identity between the contributor and the participant in character.

The Court observed that when the business in question involved a non-member and concerned non-fire insurance, the member acted as a stranger to that transaction. In such circumstances there was no identity between the person who contributed the funds and the person who participated in any surplus. Viscount Dunedin, speaking for the House of Lords, explained that where a surplus arises from a fire policy the contributors are the very persons entitled to that money, and consequently the profit on fire policies is governed by the New York case. However, with regard to employers’ liability and miscellaneous insurance business, the contributors are not fire-policy holders in the body, because they have not made contributions to that business; therefore that business stands in the same position as an arrangement with complete outsiders, and any surplus is treated as profit.

Lord Macmillan, quoted in the report on page 447 of Tax Cases, stated that the essential requirement is that every contributor to a common fund must have a right to share in any surplus, and every participant in the surplus must be a contributor to the fund. In other words, there must be complete identity between contributors and participants, and if this condition is met the particular legal form of the association is irrelevant.

The Court then turned to the precedent known as Styles’ case, which has recently been revisited by the Judicial Committee in English & Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax, Assam. After reviewing various passages from the speeches of the Law Lords in Styles’ case, Lord Normand, delivering the judgment of the Board, summarised the basis of the exemption articulated in Styles’ case as follows: first, the identity of the contributors to the fund and the recipients of the fund; second, the treatment of the company as merely an incorporated entity created for the convenience of members and policy-holders, effectively an instrument obeying their mandate; and third, the impossibility that contributors should obtain profits from contributions they themselves made to a fund that could only be expended on their behalf or returned to them.

The Judicial Committee held that none of these three grounds applied to the specific facts before it, and consequently the principles laid down in Styles’ case were entirely inapplicable to that matter. Applying the same reasoning to the present case, the Court found that, based on the facts admitted or established, the doctrines of Styles’ case, as explained by the subsequent authorities, could not be applied. There is no mutual dealing among the members in the sense of a mutual insurance arrangement, no contribution to a common fund intended to meet liabilities incurred by each contributor for the others, and no refund of surplus to the contributors. Accordingly, the principle of complete identity between contributors and participants does not arise, and the precedents concerning mutual societies are of no relevance to the present dispute.

Because there was no mutual dealing between the members, the Court held that it was unnecessary to examine whether the contributors and the participants were identical persons. It explained that, in the present case, there was no interaction among the members that could be characterized as mutual insurance, and therefore the principles laid down in Styles’ case and the subsequent authorities were inapplicable. The Court acknowledged that the maxim “no one can make a profit out of himself” was correct in theory, but warned that applying it rigidly could create confusion. It observed that nothing inherently prevented a company from earning a profit from its own members. For example, a railway company might profit from transporting passengers and also profit from transporting its shareholders; similarly, a trading company could profit from transactions with its members in addition to the profit it derived from the general public. The profit earned from the public belonged to the shareholders, but it did not revert to the members as individuals who had contributed the funds. The Court further stated that when a company collects money from its members and uses it for their benefit in a capacity other than as shareholders—namely, as persons who have supplied the fund—the company does not make a profit. In such situations, where the contributors and the recipients of any surplus are essentially the same persons, the fact that the enterprise is incorporated may be immaterial, and the incorporated company may be treated as a mere instrument or convenient agent for carrying out actions that the members could perform themselves with greater difficulty. Nevertheless, the Court cautioned that incorporation, which creates a legal entity separate from its members, could not be ignored altogether, nor could it be said that a legal entity could never earn a profit from its own members. The Court noted that it was unnecessary to consider what other types of business, besides mutual insurance, might claim exemption from tax liability under section 10(1) of the Act on the basis of the Styles’ principles. It concluded that those principles could not be applied to an incorporated company that conducted the business of horse racing and earned revenue from both members and non-members on the same basis, by offering the same or similar facilities to all participants in a single, continuous business. The counsel for the company then argued that horse racing was not the sole activity of the company; the company also operated a club, which was an association of persons cooperating to provide social, sporting and similar amenities for themselves. The counsel submitted that if the contributions received from the club’s members exceeded the cost of providing those amenities and the surplus was retained for the members’ benefit, such surplus should not be deemed taxable, and that no distinction should be drawn between entrance fees, periodic subscriptions or any other sums paid by members for the right to use the club’s facilities.

The counsel argued that no distinction should be drawn between entrance fees, periodic subscriptions, admission fees, daily charges or seasonal fees that members pay for the right to use the club’s facilities. For the purpose of this submission it was asserted that it does not matter whether the club is organized as an incorporated company or as an unregistered association. It was further submitted that the fact that the club conducts business with members of the public for which tax is payable does not make the club liable to tax on the surplus that remains after deducting the cost of providing amenities to its members. In other words, the contribution that the club receives from its members, whether by way of subscription or by charging for the use of club facilities, should not be taxed because it represents only the members’ share of the cost of the amenities. The counsel highlighted that a member enjoys the advantage of meeting fellow members in the Members’ Enclosure without having to mingle with members of the public, who have no right of entry to that area, and that the member can also enjoy a variety of other facilities that are listed in the supplementary statement of the case. Reference was made to several English and Indian club cases and other authorities that support this view. The counsel noted that Styles’ case and other decisions on mutual dealing have already been considered and need not be revisited; the focus now is on the club cases. The earliest club case cited was Carlisle and Silloth Golf Club v. Smith(1). In that case the club was an unincorporated association whose members paid subscriptions and, in return, were entitled to play on the club’s golf links. No issue of profit distribution arose. Under the lease between the club and its lessors, the club was required to admit visitors on payment of “green fees”. The sole question before the court was whether the profits arising from the green fees collected from outsiders were taxable. In delivering the judgment, Buckley L.J. referred to Styles’ case and observed that a man cannot make a profit or incur a loss from himself, which was the principle underlying the decision in Styles. However, it must be noted that the question of whether profits from members’ subscriptions were assessable was not raised in that case at all; consequently, that decision does not aid the company in the present matter. The counsel then cited Royal Calcutta Turf Club v. Secretary of State(1), where the assessee was an unincorporated club. The court held that the club carried on business within the meaning of the Excess Profits Duty Act (X of 1919) and was liable to pay tax on money received from the public in the form of entrance fees to

In the earlier case involving the Royal Calcutta Turf Club, the court noted that the club received stand fees, entry fees for race horses, licence fees paid by bookmakers and a percentage of the totalisator. As was observed in the Carlisle and Silloth Golf Club case, no issue was raised concerning the taxability of money contributed by the club’s own members. Counsel for the present company relied heavily upon the decision in United Services Club, Simla v. The Crown. In that proceeding the club was an incorporated company that neither dealt with outsiders nor derived any profit from non-members. The court was directly asked to decide whether income that the club earned from its members could be treated as taxable profit. The judgment, drawing upon the authority of Styles’ case and the Carlisle & Silloth Golf Club case, held that under English law income obtained by a society or club from its members was not subject to tax and that the same rule should be applied in India. The present submission, however, argued that such a sweeping statement ignored the true reasons for the decision in Styles’ case as later explained, and therefore could not be regarded as an accurate description of English law. Moreover, the Carlisle & Silloth Golf Club case, like the Royal Calcutta Turf Club case, did not entertain the question of the taxability of member contributions at all. In the United Services Club case there was absolutely no interaction between the club and the general public; the surplus arose solely from the club’s dealings with its members. There was no mutual transaction among the members themselves, nor any distribution of surplus to them, so the identity of contributors and participants could not be established. Consequently, the club could not invoke the exemption principles derived from either of the two earlier cases cited by Martineau J. The judgment could be sustained only on the basis that the club did not actually carry on a business with its members for profit, and therefore the excess of receipts over expenditure could not be characterized as profit from a taxable undertaking. The next authority examined was the so-called Eccentric Club case. In that matter a company limited by guarantee operated a social club whose objects were to promote social interaction among gentlemen associated with literature, art, music, drama, scientific and liberal professions, sport and commerce; to establish a club and provide members with usual club privileges; and to sell, deal in or arrange supply of various provisions and refreshments. The memorandum of association expressly provided that any profits earned were not to be distributed to members, either during the company’s existence or after its winding up. Payments made by members were for services received at the club premises, such as meals, and the company’s accounts displayed a surplus of income over expenditure, with no trade receipts from non-members.

Members paid for services they received at the club premises, such as the provision of meals and other amenities. The accounting records of the company demonstrated that its total income exceeded its total expenditure, resulting in a surplus. No revenue was recorded that could be characterized as trade income derived from persons who were not members of the club. The Court of Appeal held that the company was not engaged in any undertaking that could be described as a trade or business within the meaning of section 53(2)(h) of the Finance Act, 1920. Lord Justice Warington, writing at pages 421-422 of the Law Reports, observed that a club proprietor, whether an individual or a company, ordinarily carries on a business with a view to profit as a commercial concern. He added that the present company certainly does not do so. He stated that the proper way to regard the company is as a convenient instrument enabling members to conduct a social club whose objects are free from any commercial taint. He further noted that the transactions of sale and purchase are purely incidental to attaining the main object. He concluded that, setting aside technicalities, the entity is a members’ club and not a proprietary club or any undertaking of a similar character. (1) [1924] 1 K.B. 390; 12 Tax Cas, 058. In that case there was no business carried on with any outsider. The dealings with members did not amount to trade or business, and on that basis the profits were held not to fall within the Finance Act. The company’s situation in the United Services Club case was similar, and the decision in that case can be supported only on this principle. The Dibrugarh District Club Ltd. v. Commissioner of Income-tax, Assam case, however, is contrary to the present company’s position. In that case an incorporated company operated a club for the benefit of persons who might become members. The articles of association provided that no shareholder was entitled to the club’s benefits and privileges unless he was elected as a member. All shareholders were not members and all members were not shareholders, and profits were distributable only among the shareholders each year. The court held that the company was assessable on the full amount of its profits derived from both shareholder-members and non-shareholder members. The reason was that the company was not a mutual trading society making quasi-profits by trading with its own members and returning such profits to them. The lack of identity between contributors and participants was therefore quite obvious. The Maharaj Bag Club Ltd. v. Commissioner of Income-tax, C.P. & Berar case follows the Dibrugarh decision and does not advance the matter further. In Commissioners of Inland Revenue v. Stonehaven Recreation Ground Trustees, a recreation ground with facilities for tennis, bowls and similar activities was held on lease and managed by nine trustees. Admission to the ground was granted through daily, fortnightly, monthly or season tickets issued to applicants.

In that earlier case, the recreation ground was leased and managed by nine trustees. Six of those trustees were chosen by the holders of season tickets, while the remaining three were appointed by the Local Town Council. The court held that the trustees were liable for tax because they were carrying on a trade. Their role was likened to that of the owner of a proprietary club who operated the club with the intention of making a profit. The authorities cited for this proposition were the 1927 decision reported in the Calcutta Law Reports at page 971, the 1927 edition of the All India Reporter at page 577, and the Income Tax Cases at page 521, as well as the 1931 decision reported at page 201 of the Income Tax Cases and the 1929 decision reported at page 419 of the Tax Cases and at page 523 of the Annual Tax Cases. In the matter of National Association of Local Government Officers v. Watkins, the dispute involved an unregistered trade union that aimed to protect the interests of employees of local governments and to promote their physical and social welfare. The association had bought an existing holiday camp to provide inexpensive holiday facilities for its members, but it also accepted short-term bookings from non-members who had previously used the camp. By the association’s rules, the property belonged to the members collectively, and any profits were shared by the membership as a whole rather than by those who actually used the camp. The association argued that only the profits derived from non-members should be taxable. The Crown, however, maintained that because the camp users could not be identified with the entire membership, there was no mutual trading, and therefore the whole profit should be assessed for tax. Justice Finley gave effect to the association’s argument, emphasizing that because the body was not a registered corporation, the property was owned directly by the members, giving them a right to the entire profit and precluding any trade or sale between the association and its members.

The two decisions of the Judicial Commissioners’ Court concerned the Commissioner of Income-Tax, Bombay v. Karachi Chamber of Commerce and the Commissioner of Income-Tax, Bombay v. Karachi Indian Merchants Association. Both cases dealt with mutual dealings among members who contributed funds for their common benefit. In those cases, the surplus was returned to the contributors not as shareholders but as persons who had contributed in excess, and it was held that such a surplus could not be characterized as profit and therefore was not taxable. In the present case, the court observed that there was no mutual dealing among the members themselves, nor was there any common fund contributed by the members for the purpose of discharging obligations to each other for mutual benefit. Instead, the entity in question was an incorporated company that had been authorized to operate an ordinary race-course business, as well as to act as a licensed victualler and refreshment purveyor, and it was indeed carrying on such ordinary commercial activities.

The Court noted that the company conducts its activities as a regular commercial enterprise and that there is no dispute that the transactions it undertakes with persons who are not members occur in the ordinary course of business and are pursued with the objective of earning profits, just as any other commercial concern would do. The Court further accepted that certain transactions with the company's members are also carried out in the ordinary course of business and that the profits arising from such transactions, for example the fourth item of receipt amounting to Rs. 82,490, are therefore taxable. It was explained that the company provides to its members the same or substantially similar amenities that it provides to non-members. These amenities include the use of an unreserved seat in a stand, the facility to watch the horse races, the opportunity to place bets on the horses, the use of the totalisator located in that stand, and the provision of refreshments. The Court observed that the daily ticket fee required for admission to the Members’ Enclosure is identical to the fee charged for admission to the First Enclosure, which is open to the general public. The only distinction is that a separate enclosure equipped with its own totalisator is reserved for members, allowing them to socialize with fellow members without intrusion by non-members. The Court held that this privilege arises from the members’ status in the company, for which they pay an entrance fee upon election as members and continue to pay periodic subscriptions; neither of these fees is sought to be brought to charge. Apart from this privilege, the other facilities mentioned above that members receive are, in substance, the same as those enjoyed by the public. Both members and non-members receive these facilities for a price, and the nature of the charge imposed on members is essentially the same as, or very similar to, the charge imposed on non-members. Consequently, the company receives monies from both categories of persons in exchange for the same or similar facilities supplied in the course of a single business operation. The Court concluded that the dealings with members and with non-members both reveal the same profit-earning motive and are equally commercial in character. In these circumstances, the Court held that all four items of receipt received from members must be included in the computation of the company’s total income. The Court further observed that the fact that the company had historically enjoyed exemption from taxation is irrelevant, as no prescriptive right to such exemption can be claimed. Turning to the second question, the Court stated that it does not require prolonged consideration. The answer depends on a proper construction of section 10(6) of the Act, specifically on the meaning of the phrase “a trade or professional or similar association.” The Court asked whether the company falls within any of those descriptions and affirmed that it is certainly not a professional association. Counsel for the company argued that a “trade association” is not identical to a “trading association.” Referring to Webster’s New International Dictionary, second edition, page 264, the Court noted that the term “trade association” is defined as an association of tradesmen, businessmen or manufacturers for the …

The Court observed that the expression “protection and advancement of their common interest” describes a trade association only in the narrow sense of an organization of tradesmen, businessmen or manufacturers formed for that purpose, and it concluded that the company before it did not fall within that meaning even though the company conducts a business. Consequently, the Court considered it unnecessary to examine further whether the facilities or amenities provided by the company to its members could be characterised as “services” within the definition contained in section 10(6) of the Income-Tax Act. The Court stated that, in its opinion, section 10(6) was inapplicable because the company was not a trade, professional or similar association as contemplated by that sub-section. Accordingly, the Court held that every receipt referred to in the questions, which had been received from the members, arose from business dealings with those members and therefore fell within the meaning of section 10(1). None of those receipts could be said to have been received by the company in its capacity as a trade, professional or similar association within the meaning of section 10(6). In the Court’s view, the High Court ought to have answered question I in the affirmative and question II in the negative. Accordingly, the appeal was allowed. The Court ordered that the costs of the appeal and the costs of the proceedings in the High Court be awarded to the Commissioner of Income-Tax. The appeal was thus allowed, and the agents for the appellant and the respondent were respectively identified as G H Rajadhyaksha and Rajinder Narain.