COMMISSIONER OF INCOME-TAX, BOMBAY CITY versus ROYAL WESTERN INDIA TURF CLUB LTD.

S.C.R.

SUPREME COURT REPORTS

289

has been raised that in the community to which the parties belong there was any such well recognised practice or belief. The defendants in the written statement make no assertion about it. But on the other hand, the plaintiff in paragraph 12 of his plaint asserts that the--

" Institution of samadhi and ceremonies connected

1953

Saraswathi Ammal and Another v, Rajagapal Ammal.

with it are not usual in the community to which the Jagannadhada• parties belong ".

J.

Indeed it may be assumed that such a practice is not likely to grow up amongst Hindus where crema tion and not burial of the dead is the normal practice, except probably as regards sannyasis and in certain dissident communities. We see no reason to think that the Madras decisions are erroneous in holding that perpetual dedication of property for worship at a tomh it; not valid amongst Hindus.

We accordingly affirm the judgment of the High Court and dismiss the appeal but in the circumstances without costs.

Appeal dismissed.

Agent for the appellant: S. Subramanian. Agent for the respondent: M. S. I~. Aiyangar . .,

COMMISSIONER OF INCOME-TAX, BOMBAY CITY v. ROYAL WESTERN INDIA TURF CLUB LTD. [PATANJALI SASTRI C.J., s. R. DAS, VIVIAN BOSE, GHULAM HASAN and BHAGWATI JJ.]

196J

Oct. 26.

Income-tax Act (XI of 1922), s. 10(1), s: 10(6)-Race coitrse company-Receipts fron• members- Whether receipts from bnsiness -Assessability-Applicability of rule in Styles' case-Difference between mutital insitrance societies and clitbs, and race coitrse com panies-"Trade association", mean.inf} of.

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SUPREME COURT REPORTS

[1954]

19.13 - -

India Turf Club Ltd.

Irwo1ne-tax, Bombay City v.

The assessee, the Royal Western India Turf Club Ltd., was formed inter a,lia for the purpose of carrying on the business of a Commissioner 01 race course company in all its branches and to establish clubs, hotels and other conveniences in connection with the p1·operty of the company. It had two classes of members, clU:b members, whose number "ras limited to 350 and stand members who were Royal TVestern elected by ballot. Every n1ember paid an entrance fee and an annual subscription. The liability of the members was liinited by guarantee and if there was any surplus on winding up, it was to be paid to the members in equal shares. An admission fee v..'aB levied from the members for admission to the fifembers' Enclosure, and from non-members for admission to the other Enclosures, and in each Enclosure there was a totalisator. The moneys received from members as well as non-members were included in one pool In and distributed ·a1nongst the holders of the winning tickets. each Enclosure refresh1nents were supplied on payment. The company admitted that moneys realised from non-members were receipts from business and taxable, but contended that the follow- ing items of receipts received from 1nemhers were not assessable to income.tax, viz., (1) season ad1nission tickets from members, (2) daily admission gate tickets from members, (3) use ·of private boxes by members, (4) income from entries and forfeits received from men1bers whose horses did not run. The High Court of Bombay held that items 1, 2 and 3 did not fall either under s. 10(1) or s. 10(6) of the Income-tax Act and were therefore not ta.xable, but item 4 fell withins. 10(1) and s. 10(6) and was taxable. The Commissioner of Income-tax appealed:

Held, (i) that the principles of St-yle.•' case as explained by subsequent cases had no application to the Company as there was no mutual dealing be.tween the m~mbers inter se in the nature of mutua.l insurance and no contrib't.tion to a common fund put up for payn1ent of liabilities undertaken by each contributor to the other contributors, and no refund of surplus to the contributors, but on the other hand, the company realisod moneys both from the members and non-1nembers for the same consideration, namely, by the giving of the same or similar facilities to all alike in the course ...of one and the same business carried on by it;

"(ii) that, as the company was formed for carrying on a busi ness, it had dealings with its members also in the ordinary course of business, and gave the sa1ne or similar amenities to members and nori-members, and there were no mutual dealings between the members or a common fund for the discharge of common obliga tions to each other, the principle applicable to the surplus of contributions ma.de by members of a club for providing themselves with amenities was ·also not applicable to the case;

{iii) a "trade association" means an association of tradesmen, businessmen or manufacturers for their common protection and advancement, and the assessee was not therefore, " a trade or sim.il~r assqciatiqn" vyithin ~- 10($) of the Incom.e-tax Act;

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1953

Oommiasioner of Income-tax, Bombay Oity v. Royal Western India Turf Olub Ltd.

S.C.H.

SUPREME COURT REPORTS

291

(iv) that all the abovementioned 4 items of receipts fro_mmem bers were received by the company from business carried on by it with its members within the meaning of s. 10(1) and none of them was received by the company as a trade, professional or similar association within the meaning of s. 10(6), and all the items were accordingly assessable to income-tax.

The New York Life Insnrance Co. v. Styles (Snrveyor of Taxe.~) (1889) 14 App. Oas. 381, The Cornish Mntnal 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 ct Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax, Assam [1948] A. C. 405; 16 I.T.R. 270, Carlisle and Silloth Golf Cliib v. Smith [1913] L. R. 3 K. B. 75, Royal Calcittta Tiirf Club v. Secretary of State (1921) I.L.R. 48 Cal. 844, United Services Clnb, Simla v. The Crown (1921) I.L.R. 2 Lah. 109, Eccentric Club Case [1924] L.R. 1 K. B. 390, Dibrugarh District Clitb Ltd. v. Com missioner of Income-tax, Assam (1927) I.L.R. 55 Cal. 971, The Maharaj Bag Clnb Ltd. v. Commissioner of Income-tax, C. P. di Berar, (1931) 5 I.T.C. 201, Commissioners of Inland Revenue v. StonehavenRecreation Ground Trustees(l929) 15 Tax Oas. 419, The National Association of Local Government Officers v. Watkins (1934) 18 Tax Oas. 499, Commissioner of foJome-tax, Bombay v. Karachi Chamber of Commerce (1940] I.L.R. Kar. 140; (1939] 7 I.T.R. 575 and Gommissio1zer of Incomda:c, Bom?ay v. Karachi Indian Merchants Association A.LR. 1939 Sind 56; 7 I.T.R. 595, referred to.

CIVIL APPELLATE

JURISDICTION :

Civil Appeal

No. 165 of 1951.

Appeal by special leave granted by the Supreme Court on the 27th March, 1951, from the Judgment and Order dated the 22nd March, 1950, of the High Court of Judicature at Bombay (Chagla C. J. and Tendolkar J.) in its Original Civil Jurisdiction in Income-tax Reference No. 30 of 1947.

M. 0. Setalvad, Attorney-General for India (G. N. Joshi, with him) for the Commissioner of Income-tax.

B. J. M. Mackenna (P. N. Mehta, with him) for

the respondent.

1953. October 26. The Judgment of the Court was

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delivered by DAS J •

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1953 DAS J.-This is an appeal, by special leave granted ·' by this court, from the judgment and order pronounced -. -. , ommissioner oJ by the High Court of Jud10ature at Bombay on the Income-tax, Bombay City 22nd March, 1950, on a reference (I. T. Reference No. 30 of 1947) made by the Income-tax Appellate Royal Western Tribunal at the instance of the appellant under sec India Turf Club Ltd.

tion 66(1) of the Income-tax Act (XI of 1922).

v.

Da' J.

The facts necessary to be stated for the purpose of disposing of the present appeal are these: The Royal Western India Turf Club Ltd. (hereinafter referred to as the "company") was incorporated in 1925 under the Indian Companies Act, 1913. The objects for which the company was incorporated were, inter a.lia as follows:-

(a) To take over the assets, effects and liabilities of the then unincorporated club known as the Western India Turf Club;

(b) to carry on the business of a Race Course Com-

pany in all its branches ............... ;

(c) to establish any Clubs, Hotels and other con veniences i~ connection with the property of the company;

( d) to carry on the business of Hotel Keepers, Tavern Keepers, licensed victuallers and refreshment purveyors;

(e) to sell, improve, manage, develop, lease, mort gage, dispose of or otherwise deal with all or any part of the property of the company, whether movable or immovable, with power especially to sell and distribute or to permit to be sold and distributed wines, spirits, tobacco and other stores.

The liability of the members is limited by guarantee, each member undertaking to contribute to the assets of the company, in the event of its being wound up, such sum as may be required, not exceeding one rupee, for payment of the debts and liabilities of the company and the costs, charges and expenses of the winding up. Clause 6 of the memorandum provides that if upon the winding up or dissolution of the company there remains after the satisfaction of all debts and liabilities any

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Oorwmissioner of lnco·1ne-taa;. Bombay City v. Royal Western India Turf Club Ltd.

DasJ.

S.C.R.

SUPREME COURT H,EPORTS

293

property whatsoever, the same would be paid to oi' distributed among the members of the club in equal shares.

Under the company's articles of association that the accounting year, besides were in force during Honorary Stand Members, Visiting Members and Tem porary Members there were two main categories of members, namely, the Club Members and Stand Members. The number of Club Members was limited to 350, exclusive of four designated high dignitaries and the number of Stand Members was liable to be limited by the committee at any time. Club Members and Stand Members had to be elected by ballot by the committee. On election every Club member had to pay an entrance fee of Rs. 150 and a stand member had to pay an entrance fee of Rs. 75. Members of either class had also to pay an annual subscription of Rs. 25. The entire management of the company and the control over its funds and property were left in the hands of a committee of nine Club Members elected as provided in the articles of association of the company.

The company was and is the lessee of two plots of land, one in Bombay and the other in Poona. Two race courses have been laid out on these plots of land. On each race course there are three enclosures known as Members' Enclosure, First Enclosure and Second Enclosure. Each enclosure has a stand or stands from which races are watched. The Members' Enclosure is for the exclusive use of the members, their wives and unmarried daughters above the age of 12 years and their guests. The First and Second Enclosures are open to the public. For admission into each of the In the three enclosures an admission fee is charged. Members' Enclosure admission is by season tickets or daily admission gate tickets. Private Boxes in the Members' Enclosure are available to members on pay ment according to the number of chairs in the box. In addition to the admission fees to the Members' Enclos ure, a member has to pay, in respect of his guests, an additional fee. In each of the enclosures there is a totalisator run on the pari-mutual system at which

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SUPREME COURT REPORTS

[-1954]

1953

persons in that enclosure place their bets on each race. These several totalisators are linked by electric appli Oommissioner of ances, so that the moneys received from members Inc~me-t~x: and non-members are included in one pool and distri ity buted amongst the holders of the winning tickets in Bom ; In each enclosure there is arrange- Royai w,.tern equal proportions.

India Turf ment for the supply of refreshments on payment. oiub Ltd.

The present disputes arose in connection with the assessment of the company's income,. profits or gains in the accounting year 1st July, 1938, to 30th June, 1939. The company received large sums of money on admission tickets from members as well as from non members, besides other moneys on other accounts. The company claimed that in computing its total income, the following four items of receipts should be excluded:-

DasJ.

( 1) Season admission

tickets from

members

(2) Daily admission gate tickets from

members

(3) Use of private boxes by members ( 4) Income from entries and 'forfeits received from the members whose horses did not run in the races during the season

Rs. 23,635

Rs. 51,777 Rs. 21,490

Rs. 82,490 There was no dispute as to the liability of the com pany in respect of moneys received from non-members and moneys received on all other accounts. The Income-tax Officer held that all the four items mention ed above were receipts from business falling under sec tion 10(1) of the Income-tax Act or, in the alternative, were receipts by an association performing specific services for its members for remuneration definitely related to those services within the meaning of sec tion 10(6) of the Act and assessed accordingly. On appeal by the company the Appellate Assistant Com missioner dismissed the appeal. He held that the company was carrying on business and that all the above-mentioned four items were receipts from business within the meaning of section 10(1), although none of those items fell within section 10(6). On a further

s.c.:R.

SUPREME UOURT :REPO:R'fS

295

1953

appeal by the company to the Income-tax Appellate Tribunal the latter came to the conclusion that none Oommisaioner of of the sums in question could be said to be profits or Income-tax, gains of a business coming under section 10(1). The Bombay Oity Tribunal also held that items 1, 2 and 3 did not also come within the ambit of section 10(6) of the Act. Royal Western India Turf Apparently the Tribunal did not cons1 er t e app 10a- Olub Ltd. bility of section 10(6) with regard to the fourth item. On the application of the Commissioner of Income tax, Bombay, the Appellate Tribunal, under sec- tion 66(1) of the Act referred the following two ques- tions for the opinion of the Bombay High Court, namely-

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( 1) whether on the facts found or admitted in the case, The Royal Western India Turf Club Ltd., Born bay, received the sums of Rs. 23,635, Rs. 51,777, Rs.21,490 and Rs. 82,490 from a business carried on by it with the members within the meaning•ofsection 10(1) of the Indian Income-tax Act?

(2) whether on the facts ·found or admitted in the case, The Royal Western India Turf Club Ltd., Bombay, the sums of Rs. 23,635, Rs. 51,777 and received Rs. 21,490 [and Rs. 82,490 with regard to which sum the Tribunal did not consider the applicability of sec tion 10(6)] as a trade, professional or similar associa tion performing services for its members for remunera tion definitely related to those services within the meaning of section 10(6) of the Indian Income-tax Act?

The reference having come up for hearing the High Court found that the statement of the case was in sufficient and incomplete and accordingly it sent back the reference to the Appellate Tribunal with directions to submit a proper statement of facts. The Appellate Tribunal thereupon submitted a supplementary state. ment of the case setting forth in greater detail the facts necessary for the disposal of the reference. On further hearing of the reference in the light of this supple mentary statement of the case the High Court held that the company performed two distinct functions, namely, the carrying on of the business of racing and the carrying on of the ch.ib and tbatc the first three

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SUPREME COURT REPOR'l'S

[1954)

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items of Rs. 23,635, Rs. 51,777 and Rs. 21,490 were ,, charged to the members in respectofthevariousamen- -:--:- l 01nniissione.r -oJ . ities spem e m t e supp ementary statement of the Income·tax Bombay c;;y case which were given by the club only to its members namely, the use of the Members' Enclosure on payment Royal We.tern of admission fee, the use of the members' totalisator, 1 the right to watch the races from the lawn or from an un -;,: '{,,~~! reserved 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 High Court held that the said first three items did not fall either under section 10 ( 1) or section 10 ( 6) of the Act. With regard to the sum of Rs. 82,490 the High Court held that it did not come under section 10 (6) but was a part of the income of the business of horse racing done by the company. Accordingly the High Court answered ques tion No. 1 in the negative as regards the first three items of Rs. 23,635, Rs. 51,777 and Rs. 21,490 and in the affirmative as regards the fourth item <:if Rs. 82,490 and it answered question No. 2in the negative in respect of the first three items and in the affirmative with regard to the fourth item. In effect the High Court held that the first three items were not taxable either under section 10 (1) or section 10(6) and that the fourth item was taxable under both the said sub-sections of that section.

The Bombay High Court having dismissed the appli cation of the Commissioner of Income-tax under section 66-A (2) to appeal to this court, the Commis sioner applied for and obtained special leave to appeal to this court. The company has not appealed from that part of the order which declared that the fourth item of Rs. 82,490 was taxable. Therefore, the ques tions we have to decide in this appeal are :

(1) whether the first three items are receipts from

business carried on by the company, and

(2) \Vhether those three items are receipts by a trade or professional or similar association performing specific services for its members for remuneration definitely related to those services.

On the first point our attention is drawn to · the objects of the company as set forth in its memorandum

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SUPREME COURT REPORTS

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therein and for

1953 -. -. (Jommiss1oner of Income-tax Bombay Oit~ v.

It appears that the objects of the of association. company are, inter alia, to carry on the business of a d Race Course company mall its ranc es an to carry on the business of Hotel Keepers, tavern keepers, licens- ed victuallers and refreshment purveyors. Although this circumstance may not be decisive, it cannot at the Royal Western same time be overlooked altogether. It has to be noted India Turf as one of the material facts. Then we have the fact Olub Ltd. that so far as non-members are concerned the company does carry on a horse racing business and the moneys it realises from non-members for admission into the First and Second Enclosures to watch the races the seat from an unreserved use of the totalisator and other amenities are income, profits or gains of that business. It is also to be noted that the rates of daily admission fee charged on the non-members for admission into the First En- closure and for the railway tickets are exactly the same as those charged from the members for admission into the Members' Enclosure. Finally, it has been declared by the High Court by the order under appeal-and it is now accepted by the company-that the company derived the sum of Rs. 82,490 (the fourth item men- tioned above) from the horse racing business carried on by it with its members within the meaning of section 10( 1) of the Act. If this sum of Rs. 82,490 received from members represents, as held by the High Court, a part of the income of the horse racing business, why are not the first three items of receipts also parts of the income, profits or gains of that very business ? On what principle or authority are those three items to be excluded from the computation of the total business income of the company ?

In support of its claim for exemption from tax liability in respect of these three items the company relies on the principles laid down by the House of Lords in the much discussed case of The New York Life Insurance Co. v. Styles (Surveyor of Taxes) (1 ). The appellant in that case was an incorporated company. The company issued life policies of two kinds, namely, participating and non participating. There were no shares or shareholders in

(1) (1889) 2 Ta" Cas. t6o; L.R, r4 App. Cas. 38r,

298

SUPREME COURT REPORTS

[1954]

1953

DasJ,

the . ordinary sense of the term but each and every Commissioner of holder of a participating policy became ipso facto a Income-tox, member of the company and as such became entitled to a share in the assets and liable for a share in the Bomboy Oity losses. A calculation was made by the company of v. the probable death rate among the members and the Royal Western India Turf probable expenses and liabilities and calls in the Olub Ltd. shape of premia were made on the members accordingly. An account used to be taken annually and the greater part of the surplus of such premia over the expenditure referable to such policies was returned to the members i.e., (holders of participating policies) and the balance was carried forward as fund in hand to the credit of the general ·body of members. The question was whether the surplus returned to the members was liable to be assessed to income-tax as profits or gains. The majority of the Law Lords answered the question in the negative. It will be noticed that in that case the members had associated themselves together for the purpose of insuring each other's life on the principle of mutual assurance, that is to say, they contributed annually to a common fund out of which payments were to be made, in the event of death, to the represent atives of the deceased members. Those persons were alone the owners of the common fund and they alone were entitled to participate in the surplus. It was, therefore, a case of mutual assurance and the indivi duals insured and those associated for the purpose of meeting the policies when they fell in and receiving the surplus, were identical and it was said that that identity was not destroyed by the incorporation of the company. Lord Watson even went to the length of saying that the company in that case did not carry on any business at all, which perhaps was stating the position a little too widely as pointed out by Viscount Cave in a later case; but, be that as it may, all the noble Lords who formed the majority were of the view that what the members received were not profits but were their respective shares of the excess amount contributed by them selves.

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T-he cases of The Cornish 111 utual Assu.rance Co. Ltd· v. The Commissioners of Inland Revenue(') and Jones v,

' 1

~T) [r926~ A.C. 281; 12 Ta~ Cas. 8t1~

S.C.R.

SUPREME COUR.T REPORTS '

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South Wales Lancashire Goal Owners' Association Ltd.('), 19o3 - both of which were cases of mutual assurance com- . panies with the liability of the members limited by 00 mmissio ner of 1 nconie· ax, 1 I ndee , t e Bombay City guarantee carry the matter no further. decision in the Cornish case as to the surplus of the contributions over the expenses would have been the Royal Western same as in Styles' case (supra) but for the special provi- India Turi sions of section 52(2)(b) according to which profit was Olub Ltd. made to include in the case of mutual trading concer~s the surplus arising from transactions with members. Jones' case also shows that the fact that under the rules the surplus was not distributable except on the winding up of the company makes no difference in the applica- tion of the principle laid down in Styles' case (supra).

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"

Municipal Mutual Insurance Ltd. v. Hills( 2)was relied on by the learned Attorney-General as showing the real ground on which Styles' case (supra) was decided. The appellant there was an incorporated company. It was formed by the representatives of various local authori ties by co-operation to insure against fire on favour able terms. Effective control was in the•hands of the fire policy holders who alone were entitled, on winding up of the company, to participate in the surplus assets. In course of time the company undertook an extensive business in employers' liability and miscellaneous insurance. The Crown admitted that fire insurance business which was a mutual business was not taxable. The company admitted that the employers' liability and miscellaneous insurance business done with out siders were liable to tax. The question was whether the employers' liability and miscellaneous insurance business done with fire policy holders who were mem bers of the company were liable to be brought to charge. It was held by Rowlatt J. that they were and this decision was upheld by the Court of Appeal and the House of Lords. The argument in that case was that where the person with whom employers' lia bility or mis~llaneous insurance business was done happened to be also a fire policy holder, the profit or

(1) (1927] A.e. 827; II Tax Cas. 790. (2) (1932) r6 Tax Cas. 430; 48 T.L.R. 301; r47 L.T. 62.

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SUPREME COURT REPORTS

[1954]

1953

v.

surplus arising from that operation came back into a Commissioner of body of.which he himself was a member. This circum stance, it was claimed, made it mutual and as such Income·tax Bombay Cit~ exempt from taxation under Styles' case. This argu- ment was repelled by Rowlatt J. on the ground, inter Royal Western alia, that there was not the slightest distinction between I~~~~ 'f,~'.J what was made out of a member in resnect of non-fire business and what was made out of a non-member out of non-fire business, for qua that business the member was a stranger. In other words, there was no identity in character of the contributor and the participator. Said Viscount Dunedin in the House of Lords :-

Daa J.

"In so far as the surplus arises from a fire policy they are really entitled to the money as being those who contributed it and accordingly it has been admit ted that any profit made on the fire policies is governed by the New York case. But as regards employers' liability business and miscellaneous business it does not go to the contributors for, as fire policy holders in a body, they have not contributed and therefore the business is in the same position as business with com plete outsiders, the surpluses in which are admitted to be profit."

Lord Macmillan said at page 447 of the report in

Tax Cases:-

" The cardinal requirement is that all contributors to the common fund must be entitled to participate in the surplus and that all the participators in the surplus must be contributors to the common fund ; in other words there must be complete identity between the contributors and the participators. If this requirement is satisfied, the particular form which the association takes is immaterial."

Styles' case (supra) has recently been examined and explained by the Judicial Committee in English & Scottish Joint Co-operative Wholesale Society Ltd. v. Commissioner of Agricultural Income-tax, Assam('). After referring to various passages frortl the speeches of the different Law Lords in Styles' case, Lord Normand, who delivered the judgment of the Board, summarised the grounds·of the decision in Styles' case as follows:

(I) [1948] A.C. 405; 75 I.A. 196; 16 l,T.R. 270.

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" From these quotations it appears that the exemp-

191i3

ti on was based on (1) th.e ~dentity of the contributors to Commissioner of the fund and the recipients from the fund, (2) the Income.tax, treatment of the company, though incorporated as a Bomhay Oity mere entity for the convenience of the members and policy holders, in other words, as an instrument RoyalWestcrn 1~t: [~~! obedient to their mandate and (3) the impossibility that contributors should derive profits from contribu- tions made by themselves to a fund which could only be expended or returned to themselves."

JJasJ.

v.

The Judicial Committee held that none of these grounds was available on the special facts of the case before them and, therefore, the principles laid down in Styles' case (supra) were wholly inapplicable to that case.

It is clear to us, taking the facts admitted or found in the case before us, that the principles of Styles' case, as explained by subsequent decisions noted above, can have no application to this case. Here there is no mutual dealing between the members inter se in the nature of mutual insurance, no contribution to a common fund put up for payment ofliabilities undertaken by each contri butor to the other contributors and no refund of surplus to the contributors. There being no mutual dealing the question as to the complete identity of the contri butors and the participators need not be raised or considered. Suffice it to say that in the absence, as there is in the present case, of any dealing between the members inter se in the nature of mutual insurance the principles laid down in Styles' case and the cases that followed it can have no application here. The principle that no one can make a profit out of himself is true enough but may in its application easily lead to con fusion. There is nothing per se to prevent a company from making a profit out of its own members. Thus a railway company which earns profits by carrying passengers may also make a profit by carrying its share holders or a trading company may make a profit out of its trading with its members besides the profit it makes from the general public which deals with it but that profit belongs to the members as shareholders and does

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not come back to them as persons who had contribut- 195a if ed them. Where a company collects money from its -. -. ommissioner o . Income-tax, members and applies it for their benefit not as share- Bombay City holders but as persons who put up the fund the com- In such cases where there is pany makes no profit. v. identity in the character of those who contribute and Royal Western 1;~; ft~~! of those who participate in the surplus, the fact of incorporation may be immaterial and the incorporated company may well be regarded as a mere instrument, a convenient agent for carrying out what the members might more laboriously do for themselves. But it cannot be said that incorporation which brings into being a legal entity separate from its constituent mem bers is to be disregarded always and that the legal entity can never make a profit out of its own members. What kinds of business other than mutual insurance may claim exemption from tax liability under sec tion 10(1) of the Act under the principles of Styles' case need not be here considered ; it is clear to us that those principles cannot apply to an incorporated company which carries on the business of horse racing and realises money both from the members and from non members for the same consideration, namely, by the giving of the same or similar facilities to all alike in course of one and the same business carried on by it.

..

Learned counsel for the company then contends that the carrying on of the business of horse racing is not the only function or activity of the company. It also runs a club, that is to say, an association of persons who co-operate to provide for themselves social, sport ing and similar amenities. If the contributions from the members of the club exceed the cost of providing the amenities and if the surplus is held for the benefit of the members such surplus, according to him, is not taxable. For this purpose no distinction, it is said, can be made between the entrance fees or the periodical subscriptions or any other sum (e.g., admission fee, daily or seasonal) paid by the members for the right to make use of the amenities provided by the club. For the purposes of this argument it is said to be imma terial whether the club is an incorporated company or an Ul}r~ftiste1·ed association. Finally it is urged that

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1983 -. -. 01nmtastoner of Income-tax

the fact that a club has business dealings with the Public in respect of which tax is payable does not . render the club hable to tax m respect of the dwerence between the cost of providing amenities for its members Bombay Oi;y and the contribution towards this cost which the club takes from its members either by way of subscription Royal Western or of charges for the use of club amenities, The India Turf Olub Ltd. advantage of a member, it is pointed out, is that he can meet his fellow members in the Members' Enclosure without having to rub his shoulders with the members of the public who have no right of entry in the Members' Enclosure and he can also have the various other amenities provided exclusively for members which are listed in the supplementary statement of the case. Reference is made by learned counsel to several club cases, English and Indian, and other cases in sup- port of his contentions. Styles' case and other cases of mutual dealing have already been dealt with and need not be referred to again. It will suffice now to examine the club cases.

DaaJ.

The earliest club case cited before us is that of Carlisle and Silloth Golf Club v. Smith('). In that case the club was an unincorporated association of members who paid subscriptions and became entitled to play on the golf links of the club. There was no question: of division of profits. Under the lease between the club and its lessors the club was bound to admit visitors on payment of "green fees". The only question was whether the profits arising out of the "green fees" collected from outsiders were taxable. In course of his judgment Buckley L. J. referred to Styles' case and said that a man could not make a profit or loss out of himself and that that was the ground of deci sion in Styles' case. It should not, however, be over looked that the question whether the profits arising out of the members' subscription were assessable or not was not in issue in that case at all. That decision, therefore, does not help the company in this case.

In the Royal Calcutta Titrf Club v. Secretary of State (2) the assessee was an unincorporated club. It was held

(r) [r9r3] 3 K.B. 75; 6 Tax Cas. 198. (2) (r92r) I.L.R. 48 Cal. 844; A.l.R. (1921) Cal. 633; (1921) 1 1.T.C

108.

304

SUPHEME COUHT RE:POltTS

[1954]

0

1 0

that the club carried on business within the i:iieaning 1953 of the Excess Profits Duty Act (X of 1919) and was -. -. liable to pay tax in respect of money received from the ommi .. ioner , I nconie-tax, Bombay City public by way of entrance fees to the stand, entry fees for race horses, book makers' license fees and percent- Royal Western ages of the totalisator. There, as in the Gctrlisle and 1~:,;: '{,~~! Silloth.Golf Club case (supra), no question was raised as to the taxability of moneys paid by the members of the clubs.

Das J.

v.

The case of the United Services Club, Simla v. 'l'he Grown(') has been strongly relied on by learned counsel for the company. There the club was an incorporated company. It had no dealings with outsiders and deriv ed no profit from outsiders. The question was directly raised as to whether the income derived from its members was taxable profit. It was held, on the authority of Styles' case and the Carlisle & Silloth Golf Club case,. that under the English law the income derived by a society or club from its members was not liable to tax and that the same principle should be followed in India. The proposition so broadly stated overlooks vhe real grounds of the decision in Styles' case as explained in later cases and cannot be accepted as an accurate statement of the English law. In Car lisle & Silloth Golf Club case as in the Royal Calcutta Tuif Club case, as akeady stated, the question of the moneys received from members was not in issue at all. In this case, namely, in the United Services Club case, there was no dealing between the company and the outside public at all and the surplus was derived by the club only out of its dealings with its members. There was no mutual dealing between the members inter se and there was no question of distribution of any the members and, therefore, there surplus amongst could be no question of identity of contributors and participators and as such the company could not claim exemption from tax under the principles of either of the two cases relied on by Martineau J. His decision can only be supported on the ground that the I. T.C.

I.L.R. 2 Lah, 109 ; A.I.R. 19z1 Lah, 208;

(1921)

(I)

I

113.

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SUPREME COURT REPORTS

305

club did not really carry on any business with its members with a view to earning profits and, therefore, the surplus of receipts from the members over the 007missioner 01 expenditure could not be said to be profit of any business which could be assessed to tax.

B::.i,m;:;-t~;Y v.

1963 -

The next case is what is known as the Eccentric Club Royal Western 1 ;::,; 'J'a~'.'f

Das J.

case(1). In that case a company limited by guarantee carried on a social club, its objects being to promote social intercourse amongst gentlemen connected (direct- ly or indirectly) with literature, art, music, the drama, the scientific and liberal professions, sports and com- merce, to establish a club and generally to afford to members the usual privileges and advantages of a club, to sell and deal in or arrange for supply of all kinds of provisions and refreshments. By its memorandum of association the profits made by it were not distributable among its members either before or even after its wind- ing up .• Payments were made by the members for services they received at the club premises, e.g., the provisl.on of meals etc. The company's account show- ed a surplus of income over expenditure. There was no receipt in the nature of trade from non-members. It was held by the Court of Appeal that the company was not carrying on any undertaking of a similar character to that of a trade or business within the meaning of section 53(2)(h) of the Finance Act, 1920. Warrington L.J. observed at pages 421-422 of the report in the Law Reports series:-

"The club proprietor, whether an individual or a company, carries on a business with a view to profit as an ordinary commercial concern. This the present company certainly does not do. I think the proper mode of regarding the company in the present case is as a convenient instrument for enabling the members to conduct a social club, the objects of which are immune from every taint of commerciality, the trans actions of sale and purchase being purely incidental to the attainment of the main object. What is in fact being carried on, putting technicalities aside, is a members' club and not a proprietary club nor any undertaking of a similar character."

(l) (1924) r K.!3. ~90; q Tax Cas. 658.

306

SUPREME COURT REPORTS

[1954]

0

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There was in that case no carrying on of any business 1963 ,, with any outsider. The dealings with members were -:--: . , ommissioner oJ rea y not m t e way o any tra e or busmess and it IS Income-tax Bombay o/ey only on that basis that the profits were held not to fall within the Finance Act. The position of the company v. in the United Services Club case (supra) was similar and; Royal W"tern 1~~:~ '£~~! as already stated, that decision can be supported only

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on this principle.

Das J.

is,

The case of Dibrugarh District Club Ltd. v .. Com- missioner of Income-tax, Assam('), if anything, against the company. There an incorporated company carried on a club for the benefit of such persons as might become members. Under the articles of asso ciation no shareholder was entitled to the benefits and privileges of the club unless he was elected as a member. All shareholders were not members and all members were not shareholders. Profits were distri butable only amongst the shareholders every y~ar. It was peld that the company was assessable on the full amount of its profits derived from shareholder members as well as from non-shareholder members as the com pany was not a mutual trading society making quasi profits by trading with its own members and returning such profits to its members. The absence of identity between the contributors and participators was quite obvious. The case of The Maharaj Bag Club Ltd. v. Commissioner of Income-tax, C.P. & Berar (')follows the Dibrugarh Club case and carries the matter no further.

In Commissioners of Inland Revenue v. Stone haven Recreation Ground Trustees(') a recreation ground with facilities for tennis, bowls etc. was held on lease and managed by 9 trustees. Admission to the ground was by daily, fortnightly, monthly or season tickets issued to any applicant. Of the 9 trustees 6 were elected by the season ticket holders and the remaining by the Local Town Council. The trustees were held assessable as carrying on a trade. The position of the trustees was akin to that of the owner of a proprietary club who carried on the club with a view to earning profits.

{I) ~1927) I.L.R. 55 Cal. 971; A.I.R. 1928 Cal. 577; 2 I.T.C. 521, (2) (1931) 5 l.T.C. 201. \3) (1929) I?Ta~ Cas.119; 8 Anf!.. ra:.;: Cas. 52~.

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SUPREME COURT REPORTS

307

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Das J.

National Association of Local Government Officers 1953 v. Watkins(') was concerned with an unregistered 0 -. -. ·' ommiseioner OJ trade umon havmg for its ObJect the protect10n of Income·t=, the interests of employees in Local Governments and Bombay City the promotion of the physical and social welfare of its members. The Association purchased an existing Royal Western 1;'f!,; 'i,;:l holiday camp to provide cheap holiday facilities for its members. Bookings were, however, for a short time accepted from non-members who had previously used the camp. By its rules the property of the Association belonged to the members and its profits enured for all members as a whole and not only for those members who used the camp. The Association contended that its liability should be confined to the profits made from non-members. The Crown claimed, on the other hand, that as the users of the camp were not identifi- able with the whole membership there was no mutual trading and the whole of the profits had been properly assessed. Finlay J. gave effect to the contentions of laid The emphasis on the fact that the Association was not a registered body and that, therefore, the property the property, not of the Association but was of the members themselves and that as the mem- bers owned the whole they had a right to partici- pate in the whole and, therefore, there could not be any trade between the Association and a rp.ember or any sale to a member. The two decisions of the Judicial Commissioners' Court, namely, Commissioner of Income-tax, Bombay v. Karachi Chamber of Com- merce(2) and Commissioner of Income-tax, Bombay v. Karachi Indian Merchants Association(3 ) were con- cerned with mutual dealings between members who had put up money for their mutual benefit. The surplus went to them not as shareholders but as per- sons who had contributed in excess and was in no sense a profit and could not, therefore, be brought to charge.

the Association.

learned

Judge

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(1934) rS Tax Cas. 499. I.L.R. (1940) Kar. 140; [1939] 7 I.T.R. 575.

(r) (2) (3) A.LR. 1939 Sind 56; [1939] 7 I.T,R. 595 .

'fl.

308

SUPREME COURT REPORTS

[1954]

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v.

1953

Das J.

As already stated, in the instant ·case there is no ,, mutual dealing between the members inter se and no -:--:- ommissioner o1 puttmg up of a common fund for d1schargmg the com- lneome-taz Bombay ci;y mon obligations to each other undertaken by the con- tributors for their mutual benefit. On the contrary, Royal w .. tern we have here an incorporated company authorised to 1~~; 't;;:;f carry on an ordinary business of a race course company and that of licensed victuallers and refreshment pur- veyors and in fact carrying on such a'business. There is no dispute that the dealings of the company with non members take place in the ordinary course of business carried on with a view to earning profits as in any It is further admitted that other commercial concern. some of the dealings of the company with its members . take place in the ordinary course of business and the profits arising out of those dealings, e.g., the fourth item of receipt of Rs. 82,490, are taxable. The company gives to its members the same or similar amenities as it gives to non-members, namely, the use of an un reserved seat in a stand, the facility to watch the races and to bet on the horses in the races, use of the total isator in that stand and the facility for refreshment. In fact the daily ticket fee for admission into the Members' Enclosure is exactly the same as that for admission into the First Enclosure to which the public have access. The only difference is that a separate enclosure with a separate totalisator is provided for the members where they can meet their fellow members and not be disturbed by the intrusion of non-members. This privilege is referable to their membership of the company for which they pay an entrance fee on their election as members and for which they pay the periodical subscriptions both of which are not sought to be brought to charge. The rest of the facilities mentioned above which the members get are in sub stance the same as those enjoyed by the public. Those facilities are given to members and non-members alike for a price. The character of the charges made on members is precisely the same as or is similar to that of the charges made on non-members, for the company· receives moneys from both members and non-members in return for the same or similar facilities given to

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309

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e tam e wit commercia i Y· n

both in the course of one and the same business. The 1953 -. -. dealings in both cases disclose the same profit earning motive an are a e Income-tax circumstances, all the four items of receipts from mem- Bombay O-ity. bers ·must be taken into account in computing the total income of the company. The fact that the company Royal Western has so long enjoyed exemption from taxation is neither India Turf Club Ltd. here nor there, for there can be no question o acquir- ing any prescriptive right to exemption from taxa- tion.

th Oommisswner of

· l't

Das J.

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. .J

The second question need not detain us long. The answer to that question depends on a true construction of section 10(6) of the Act. What is the meaning of " a trade or professional or similar associa tion ? Does this company come within any of those descriptions ? It is certainly not a professional associa tion. Learned counsel for the company contends that a "trade association" is not the same thing as a "trad ing association". According to Webster's New Inter national Dictionary, 2nd Edn., page 264 the meaning ofa "trade association" is an association of tradesmen, businessmen or manufacturers for the protection and advancement of their common interest. In our view the company before us is not a "trade association" in In this this sense although it carries on a business. view of the matter it is unnecessary to discuss the further question whether the facilities or amenities given by the company to its members may be regarded as "services" within the meaning of section 10(6). We are of opinion that section 10(6) has no application, for the company is not a trade or professional or simi lar association within the meaning of that sub-section. The result, therefore, is that we hold that all the items of receipts from members referred to in the ques tions were received by the company from business with its members within the meaning of section 10(1) and that none of them was received by the company as a trade, professional or similar assqciatio:ri within the meaning of section 10(6). In our judgment the High Court should have answered question No. 1 in the affirmat~ve and question No. 2 in the negative. The

310

SUPRkME COURT REPORTS

[1954]

appeal is allowed and we award to the Commissioner of Income-tax the costs of this appeal and those of

Comm?SBioner of th

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1953 -:--:- Income-tax,

Bo1nbay CUy v. ]loyal Western India Turf Club Ltd.

195J

November 16.

Agent for the appellant: G. H. Bajadhyaksha. Agent for the respondent: Bajinder Narain.

.;

j

Appeal allowed.

SATYABRATA GROSE v. MUGNEERAM BANGUR & CO., AND ANOTHER.

MuKHERJEA, V1vrAN BosE and BHAGWATI JJ.]

Indian Contract Act (IX of 1872), s. 56-Aareement to sell lct·nd -Doctrine of frnstratio,.-Applicetbility-Doctrine whether a.ppvic able ir1i India-'-Scope of s. 56-"Inipossible," nwaning of-Agree. inent for sale of land-B11yer's rights-English and Indian law.

The doctrine of frustration is really an aspect or part of the law of discharge of contract by reason of supervening impossibility or illegality of the act agreed to be done and hence comes within the purview of s. 56 of the Indian Contract Act. 'rhe view that s. 56 applies only to cases of physical impossibility and that where this section is not applicable recourse can be had to the principles of English law on the subject of frustration is not correct. English cases can have only a persuasive value, and are only helpful in showing how English courts decided cases under similar circum· stances.

·

Section 56 of the Indian Contract Act lays down a rule of positive law and does not leave the matter to be determined according to the intention of the parties.

According to the Indian Contract Act, a promise n1ay be ex press or implied. In_ cases, therefore, where the court gathers as a matter of construction that the contract itself contained im pliedly or expressly a term, according to which it would stand discharged on the happening of certain circumstances, the dissolu tion of the contract would take place under the terms of the contract itself and such cases would be outside the purview of s. 56 altogether. Although in English law these cases are treated as cases of frustration, in India they would be dealt with under s. 32 of the Indian Contract Act which deals with contingent contracts or similar other provisions contained in the Act. In the large majority of cases however the doctrine of frustration is applied nol on the sround that the parties themselves'ogreed to ap