Be it the rich historical tapestry and legacy of the old and renowned clubs like the Chelmsford Club in Lutyens’s Delhi, or the ‘quintessential third space’ of the Gurugram/Mumbai based new-age club- The Quorum, one thing which always remain universal and the common factor among all such social recreational clubs is the ever-hanging sword of income tax demands on the surplus earned by such clubs.
All such social recreational clubs charge various kinds of fees from their members like the life membership fees, joining fees, annual membership fees, contribution towards various social events and gatherings, and other similar charges towards the privileges, conveniences and amenities provided by such clubs to the respective members. That begs the question what is wrong with income tax department raising tax demands on any surplus being earned by such social clubs. The answer lies in the fundamental difference between commerciality and mutuality. As per the Income Tax Act, what is taxed is the income/surplus earned by a person arising out of some commercial business transactions done with some other person. As opposed to this, the principle of mutuality provides that no one can enter into a trade or business with oneself and make profits out of oneself.
A social recreational club operates and functions on the underlying philosophy of pooling of common resources towards a common objective of social recreation. In legal parlance, this principle is known as the doctrine of mutuality. The membership fees collected from members is utilized by such clubs towards providing various facilities, amenities, privileges, and for the use of club property. Where a number of persons jointly contribute to a common pool for the financing of some common objective and in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit chargeable to income tax.
The various recreational services and facilities offered by such social clubs for the usual privileges, advantages, conveniences and accommodations, exclusively to such members only and not to any non-member or outsider, are not with any profit motive, and are not tainted with commerciality. The surplus, if any, is also utilised in the furtherance of the objectives of such clubs, in conformity with the principle of mutuality only, and no personal gain is derived from the same.
The Supreme Court, in several landmark judgements, in the cases of Chelmsford Club, Bankipur Club, Ranchi Club and Cricket Club of India, has upheld the non-taxability of the surplus earned by such clubs out of various receipts collected from their respective members on the basis of the doctrine of mutuality.
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The three conditions, the existence of which establishes the doctrine of mutuality, are (i) the contributors to the club and the beneficiaries of the club are clearly identifiable; (ii) the constitution of the club is an instrument obedient to its members’ mandate and (iii) the impossibility that contributors should derive profits from contributions made by themselves to a fund which could only be expended or returned to themselves.
In the absence of these three conditions, the income tax immunity shield, as conferred by the doctrine of mutuality, will not be available to such social clubs. For instance, if a club, rents out its banquet hall for marriage or other occasions to non-members from the general public or opens up its gym/billiards pool/swimming pool for general public and collects usage charges from them in consideration of the same, and earns a surplus out of this, then such surplus will be taxable in the hands of such club, as it has arisen out of a commercial activity done with non-members.
However, if the club earns some surplus out of the collective fees/charges obtained by it from its members towards usage of its banquet hall/gym/billiards pool/swimming pool by its members only, who has paid the membership fees, and such surplus is being utilized for providing further facilities and amenities to its members only, then such surplus will not be taxable by virtue of the doctrine of mutuality.
However, the doctrine of mutuality is not recognised in the law pertaining to goods and service tax (GST) and currently any service rendered by a social club or a mutual concern, to its members, is considered as a taxable supply, and is subject to the levy of GST at 18% under section 7(1)(aa) of the CGST Act.
Mayank Mohanka is the founder of TaxAaram India and a partner at S M Mohanka & Associates.
Updated: 14 Jun 2023, 10:48 PM IST