V.K. Mehrotra, J.
1. The following questions have been referred by the Income-tax Appellate Tribunal, Allahabad Bench (hereinafter 'the Tribunal') under Section 256 of the I.T. Act, 1961 (for brief 'the Act'), for the opinion of this court :
'(i) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the income of the assessee was liable to be assessed as income from other sources ?
(ii) If the answer to question No. (i) is in the negative, was this income from property, as claimed by the Department, or business income, as claimed by the assessee ?
(iii) Whether, on the facts and in the circumstances of the case, the Tribunal was correct in rejecting the assessee's claim that this income was exempt from tax on the principle of mutuality '
2. The facts : The assessee, 'Cawnpore Club Ltd.', is a company and runs a club at Kanpur for the benefit of its members. Out of 15 rooms in its annexe, 13 rooms were let out to members of the club on payment of Rs. 250 per month per room and during the previous year pertaining to the assessment year 1971-72, the total rent collected by the assessee from these rooms amounted Rs. 36,547. The remaining two rooms were occupied by the manager of the club free of rent. The claim of the assessee, in respect of the aforesaid collection, was that these were business receipts and that the income earned was exempt from tax on the principle of mutuality. The Tribunal took the view that the income of the club from the letting out of the rooms was assessable as 'income from other sources'. It rejected the claim of the assessee that the income was exempt from tax on the principle of mutuality. The Tribunal, however, referred the aforesaid questions for the opinion of this court when approached both by the assessee as well as the Revenue.
3. The contentions : Sri Markandeya Katju, for the Revenue, has contended that the income of the assessee was attributable to and assessable as 'Income from house property' under Section 22 of the Act and could not be treated to be income from other sources, for it was not covered by the provisions contained in Section 56(2)(iii) of the Act. Also, that the principle of mutuality was not attracted in such a case. The income could not be treated to be one from business, for, admittedly, the club was not carrying on any business.
4. The income of the assessee, says its counsel Sri R.K. Gulati, could not be brought to tax as income from property which had a definite connotation in law. At best, it could be treated to be income from other sources if not from business and that even on the assumption that it was income from other sources the assessee was not liable to any tax on this income for the principle of mutuality was clearly attracted in the case. The Tribunal was in error in taking a different view. The relevant provisions of the Act :
'14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, he classified under the following heads of income :--
A.--Salaries.
B.--Interest on securities.
C.--Income from house property.
D.--Profits and gains of business or profession.
E.--Capital gains.
F.--Income from other sources.'
'22. The annual value of property consisting of any buildings or lands appartenant, thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him the profits of which are chargeable to income-tax, shall be chargeable to income-tax under the head 'Income from house property'.'
'56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head 'Income from other sources', if it is not chargeable to income-tax under any of the heads specified in Section 14, items A to E.
(2) In particular, and without prejudice to the generality of the provisions of Sub-section (1), the following incomes shall be chargeable to income-tax under the head 'Income from other sources', namely :--
(i) dividends ;
(ia) income referred to in Sub-clause (viii) of Clause (24) of Section 2 ;
(ib) income referred to in Sub-clause (ix) of Clause (24) of Section 2 ;
(ii) income from machinery, plant or furniture belonging to the assesses and let on hire, if the income is not chargeable to income-tax under the head ' Profits and gains of business or profession';
(iii) where an assessee lets on hire machinery, plant or furniture belonging to him and also buildings, and the letting of the buildings is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head ' Profits and gains of business or profession '.'
5. The scheme is clear. Any income which does not answer the description of an income under the heads contemplated by Section 14 is chargeable to tax under the head 'Income from other sources'. That is clear from Section 56(1). Sub-section (2) of Section 56 specifies some sources of which income has to be taxed under the head 'Income from other sources ' and not otherwise. Clause (iii) is one such instance. Sub-section (2) of Section 56 does not derogate from the generality of the provisions of Sub-section (1).
6. The legal position and the precedents thereabout: Income from house property postulates that what has essentially been let out is house property though some conveniences like fixtures, etc., may have incidentally been let out with it for proper enjoyment of the demised premises. If, however, the letting could not have taken place but for the fixtures, furnitures, etc., in the sense that the tenant or licensee would not have taken the premises but for them and the extent of income attributable to such fixtures or furnitures cannot conveniently be predicated, it would be income chargeable to tax under the residuary head of 'Income from other sources'. In each case, it is the question of intention of the contracting parties discernible with reference to facts objectively noticed.
7. The contention on behalf of the Revenue that there should be two lettings, one in respect of the house property and the other of machinery, plant or fixture and furniture by the assessee to enable him to claim the benefit of Section 56(2)(iii), need not detain us for the disposal of this reference, for, in a case like the present where, admittedly, what had been let out by the assessee to its members were rooms with furniture and the facility of electricity, hot water and services by way of cleaning of the rooms and serving of meals therein, the consolidated amount charged by the assessee from a member occupying the room was not merely rent for that room but also included the hire for the furniture and charges for various other services. It is not a case where the applicability of Section 56 of the Act is said to arise under Section 56(2)(iii) of the Act. Not being an income derived solely from the letting out of the room as such, or primarily from it with incidental furnishing, the income derived by the assessee cannot be brought to tax under the head 'Income from house property' under Section 22. It does not answer the description of income from any other head mentioned in Section 14 either. Clearly, therefore, it is chargeable as income from other sources under Section 56(1). The instant case is governed by the test laid down by the Supreme Court in the case of Sultan Brothers P. Ltd. v. CIT : [1964]51ITR353(SC) , where the Supreme Court observed at p. 364 thus ;
'It then becomes a new kind of income, not covered, by Section 9, that is, income not from the ownership of the building alone but an income which though arising from a building would not have arisen if the plant, machinery and furniture had not also been let along with it.'
8. Section 9 of the Act of 1922 dealt with income from house property.
9. In CIT v. Wheeler Club Ltd. : [1963]49ITR52(All) , the I.T. authorities had been treating the income derived by the assessee from hiring out of the quarters to its members as income from property assessable to income-tax under Section 9 of the Act. For the year 1955-56 also, the ITO treated the income to be from property. The assessee filed an appeal contending that the income was not assessable on account of the principle of mutuality. The Tribunal held that the income derived by the assessee was income from property but took the view that the principle of mutuality applied because in its opinion there was an identity between the contributors and participants. This court took the view, on a reference made to it at the instance of the Commissioner, that where the basis for assessing tax on an income is that it is income from property, the question of the principle of mutuality being applicable did not arise. It then proceeded to observe, even though it was not really necessary to do so, that even assuming the income to be one from business, it could not be said that there was complete identity between the contributors and the recipients so as to attract the applicability of the principle of mutuality to it. It is obvious that the question whether it was income from property or one from 'other sources' was not in issue at all nor was the question of the applicability of the principle of mutuality, in a case where the income was chargeable to tax under the residuary head was to be or considered by this court. The decision in Wheeler's case : [1963]49ITR52(All) thus does not assist the Revenue in the present case.
10. CIT v. National Storage P. Ltd. : [1963]48ITR577(Bom) was a case where an assessee had constructed vaults which it let out to film distributors on terms and conditions arrived at between them for storing the films. The key to each vault was retained by the vault holders but the key to the entrance, which permitted access to the vaults, was retained by the assessee-company which also rendered some services to the vault holders. It had a fire-alarm installed and paid an annual amount to the Municipality towards fire services. It had opened in the premises two railway booking offices free of charge for the convenience of the members for despatch and receipt of film-parcels. A canteen was run in the premises for the benefit of the vault holders and a telephone had been provided to them. The question which fell for determination was whether the income derived by the assessee was taxable under the head 'Income from business' under Section 10(2) of the Act or under 'Income from property' falling under Section 9 thereof. The Bombay High Court held thus (p. 596):
'The charges, which the company was receiving, therefore, were not the income from the exercise of property rights properly so called but was the income derived from the enterprise which it was carrying on of providing facilities for the storage of films to the licensees.'
11. In the words of the learned judges of the Bombay High Court (p. 596):
'This activity of the company......was in the nature of a business activity and the providing of vaults to the persons who wanted to store their films was a part of the business enterprise or operation, which was carried on by the company. Where house property is turned to profitable account by letting or hiring the tenements with or without such other relatively insignificant or minor services, which are ordinarily incidental to the letting or hiring, the income from the house property would be income chargeable under Section 9...... The income, which is obtained by the company in the present case, required considerable expenditure to be incurred by the company, which is ordinarily not incurred by a landlord who turns his house property to profitable account and which is also not taken into account in the deductions permissible under Section 9. In our opinion, therefore, the income, which the company obtained from the licence-holders in the present case, could not be regarded as income from property falling tinder Section 9 of the Indian Income-tax Act.'
12. In Dr. P.A. Varghese v. CIT : [1971]80ITR180(Ker) the question was whether income obtained by the assessee as rent from the Export Promotion Council for letting out to it a portion of a building constructed by him at Ernakulam was chargeable as 'income from house property' or as 'income from other sources' under Section 56(2)(iii) of the Act. The Kerala High Court took the view that it would be income from house property. The agreement entered into by the assessee contemplated that he was to provide, apart from the premises let out, (i) partitions, (ii) necessary lavatories, closets, etc., (iii) air conditioning for one room, (iv) one fluorescent tube fitting for the name board 'Export House', (v) separate electric meters, and (iv) uninterrupted water supply. It was argued on his behalf that these items constituted machinery, plants and furnitures and that the agreement evidenced letting of these things and also letting of the building and the two lettings were inseparable. He, therefore, claimed benefit of Section 56(2)(iii) and relied upon the decision of the Supreme Court in the case of Sultan Brothers : [1964]51ITR353(SC) . The learned judges of the Kerala High Court negatived the contention of the assessee and distinguished the decision of the Supreme Court in Sultan Brothers' case by observing that (p. 187): 'the counsel for the assessee relied upon that case and submitted that, applying the tests laid down by the Supreme Court to the instant case, the lease was an inseparable one and that the whole income arising thereunder would fall under the head ' Income from other sources'. But there is a primary objection in accepting the above contention, which assumes that there is in this case a letting of the machinery, plant and furniture and also a letting of the building. The question whether the two lettings form part and parcel of the same transaction or the two lettings are inseparable arises only if there are two lettings. As already pointed out there are no such two lettings in this case. The amenities which the assessee has provided in the building form part of the building which the assessee agreed to provide for the lease of the building. The above decision does not, therefore, support the assessee.'
13. Quite apart from the fact that the decision in the aforesaid case was rendered in circumstances entirely different from those obtaining in the present case, we have reservation in accepting the ground upon which the learned judges of the Kerala High Court purported to distinguish the decision of the Supreme Court in Sultan Brothers' case : [1964]51ITR353(SC) . It is not necessary for us to examine this aspect further, for, to us, it appears clear that where income sought to be taxed does not clearly answer the description of income falling under any head of income mentioned in Section 14 it becomes 'a new kind of income' chargeable to tax under the residuary head 'Income from other sources'. We have noticed the necessary facts in the earlier part of the judgment which make the income of the assessee in the present case as not being one derived from the mere incident of ownership of the house property but one composed of the hiring charges of the rooms together with those for the furniture and charges for various other services provided by the assessee-club to its members occupying the rooms.
14. The Calcutta High Court held in Indian City Properties Ltd. v. CIT : [1978]111ITR19(Cal) that, on the facts found by the Income-tax Tribunal that rent as such was chargeable for the premises and also fans and other fittings, and there being no indication in the bills or in the deed of lease as to the rent payable in respect of the fans, the Tribunal rightly held that the income derived from letting out of the building was to be assessed under Section 22 of the Act. Further, that the lift charges and air conditioning-charges which had been shown separately in the ITO's assessment order should be taxed as income from other sources under Section 56 of the Act. This decision too does not help the Revenue much in the instant case, for it holds that in a case of letting of a building, providing to the tenants certain amenities like lift services and air-conditioning, there cannot be any question of letting of any machinery, plant or furniture which was necessary to attract the applicability of Section 56(2)(iii) of the Act. The decision lends support to our view that the applicability of Section 56 is not restricted to circumstances mentioned in Sub-section (2) thereof alone.
15. Coming now to the question whether the income of the assessee was exempt from levy of any tax on the principle of mutuality, we may notice first the real principle which, in our opinion, clearly is that a person cannot trade with himself so as to yield an assessable income. The assessee is a club offering facilities to its members alone and to no outsider. The income received from these members is applied for the benefit of the members of the club alone. There is no trading activity in the sense in which it is understood commonly or in law. The club may be a juristic entity (like a company in the present case) but the nature of the payment made by the members for use of the facilities like the rooms let out to them with various conveniences, is payment by them to themselves as members of the club. We may refer to the observations of Finlay J., of the King's Bench Division, in National Association of Local Government Officers v. Watkins [1934] 18 TC 499 in the case of an unincorporated association for protecting the interest of various categories of employees in local government service which had offered facilities to its members at a holiday camp, where he said, in what has now become a classic statement, that (p. 506) :
'I cannot think that you can, in the case of a club, isolate the dining room, the library, or the other various facilities which are offered by the club. The truth of the matter is, I think, that the members own the whole. The members have a right to participate in the whole. Some members will participate in some things. Some members will participate in other things, but to no members can there truly be said to be a sale. There is, I think, no trade among the members. They cannot trade with themselves. It is upon that ground, I am afraid very imperfectly expressed, but which is fundamental and lies at the root of the thing, that I think that, so far as this camp was used by the members, no profit could accrue from its user. No profit could accrue, any more than profit could accrue from any particular thing done, from the management, say, of the dining room of an ordinary club.'
16. In CIT v. Royal Western India Turf Club Ltd. : [1953]24ITR551(SC) , the Supreme Court found that the assessee, which was an incorporated company, carried on the business of race course and that of licensed victuallers and refreshment purveyors and dealt with non-members as well in the ordinary course of business carried on with a view to earning profit as in any other commercial concern. It gave to its members the same or similar amenities as it gave to non-members, like the use of unreserved seat in a stand, the facility to watch the races and to bet on the horses in the races, use of the totalisator in that stand and the facility for refreshment. The facilities were given to members and non-members alike for a price and the dealing in both cases disclosed the same profit earning motive and were tainted alike with commerciality. It held that, in the circumstances, the four items of receipt from members which were in dispute were to be taken into account in computing the total income of the company. It noticed the decision in Watkins' case [1934] 18 TC 499 and emphasised the distinction that in that case the property was the property of the members as a whole and that there could not be any trade between the association and its member or any sale to a member.
17. In CIT v. Merchant Navy Club : [1974]96ITR261(AP) , Presidency Club Ltd. v. CIT [1981] 127 ITR 264and CIT v. Bankipur Club Ltd. : [1981]129ITR787(Patna) , the principle accepted is that in the case of a club, like the one in the present case, which is run for the benefit of members, the income accruing to the club from letting out of accommodation in that club or providing of facilities to them for payment was not liable to tax, for no one could trade with himself. In other words, what was accepted was that on the principle of mutuality the income accruing to a club in the circumstance where it dealt with its members alone and did not carry on any commercial activity as such was not liable to tax, for there could be no trade with oneself. There is thus preponderant authority for the proposition canvassed by Sri Gulati and which we find clearly acceptable.
18. The Conclusion : Our answer to question No. (i) is in the affirmative and to question No. (iii) in the negative, both in favour of the assessee and against the Revenue. With this answer, the case shall go back to the Tribunal with a copy of our judgment to enable it to pass necessary orders to dispose of the case in conformity to our judgment in terms of Section 260 of the Act.
19. In view of our answer to question No. (i), it is not necessary to answer the second question.
20. The assessee would be entitled to its costs which are assessed at Rs. 250.