Be it the wealthy historic tapestry and legacy of the outdated and famend golf equipment just like the Chelmsford Membership in Lutyens’s Delhi, or the ‘quintessential third house’ of the Gurugram/Mumbai primarily based new-age club- The Quorum, one factor which all the time stay common and the frequent issue amongst all such social leisure golf equipment is the ever-hanging sword of revenue tax calls for on the excess earned by such golf equipment.
All such social leisure golf equipment cost numerous sorts of charges from their members just like the life membership charges, becoming a member of charges, annual membership charges, contribution in the direction of numerous social occasions and gatherings, and different related expenses in the direction of the privileges, conveniences and facilities supplied by such golf equipment to the respective members. That begs the query what’s mistaken with revenue tax division elevating tax calls for on any surplus being earned by such social golf equipment. The reply lies within the basic distinction between commerciality and mutuality. As per the Earnings Tax Act, what’s taxed is the revenue/surplus earned by an individual arising out of some business enterprise transactions accomplished with another individual. Versus this, the precept of mutuality gives that nobody can enter right into a commerce or enterprise with oneself and make earnings out of oneself.
A social leisure membership operates and features on the underlying philosophy of pooling of frequent assets in the direction of a standard goal of social recreation. In authorized parlance, this precept is named the doctrine of mutuality. The membership charges collected from members is utilized by such golf equipment in the direction of offering numerous services, facilities, privileges, and for the usage of membership property. The place various individuals collectively contribute to a standard pool for the financing of some frequent goal and on this respect haven’t any dealings or relations with any outdoors physique, then any surplus returned to these individuals can’t be regarded in any sense as revenue chargeable to revenue tax.
The assorted leisure companies and services provided by such social golf equipment for the standard privileges, benefits, conveniences and lodging, solely to such members solely and to not any non-member or outsider, aren’t with any revenue motive, and aren’t tainted with commerciality. The excess, if any, can be utilised within the furtherance of the targets of such golf equipment, in conformity with the precept of mutuality solely, and no private acquire is derived from the identical.
The Supreme Courtroom, in a number of landmark judgements, within the circumstances of Chelmsford Membership, Bankipur Membership, Ranchi Membership and Cricket Membership of India, has upheld the non-taxability of the excess earned by such golf equipment out of assorted receipts collected from their respective members on the premise of the doctrine of mutuality.
The three circumstances, the existence of which establishes the doctrine of mutuality, are (i) the contributors to the membership and the beneficiaries of the membership are clearly identifiable; (ii) the structure of the membership is an instrument obedient to its members’ mandate and (iii) the impossibility that contributors ought to derive earnings from contributions made by themselves to a fund which may solely be expended or returned to themselves.
Within the absence of those three circumstances, the revenue tax immunity protect, as conferred by the doctrine of mutuality, won’t be accessible to such social golf equipment. As an example, if a membership, rents out its banquet corridor for marriage or different events to non-members from most people or opens up its health club/billiards pool/swimming pool for basic public and collects utilization expenses from them in consideration of the identical, and earns a surplus out of this, then such surplus can be taxable within the arms of such membership, because it has arisen out of a business exercise accomplished with non-members.
Nonetheless, if the membership earns some surplus out of the collective charges/expenses obtained by it from its members in the direction of utilization of its banquet corridor/health club/billiards pool/swimming pool by its members solely, who has paid the membership charges, and such surplus is being utilized for offering additional services and facilities to its members solely, then such surplus won’t be taxable by advantage of the doctrine of mutuality.
Nonetheless, the doctrine of mutuality just isn’t recognised within the regulation pertaining to items and repair tax (GST) and at present any service rendered by a social membership or a mutual concern, to its members, is taken into account as a taxable provide, and is topic to the levy of GST at 18% underneath part 7(1)(aa) of the CGST Act.
Mayank Mohanka is the founding father of TaxAaram India and a companion at S M Mohanka & Associates.
Up to date: 14 Jun 2023, 10:48 PM IST