Uday Sinha, J.:— These are three references under section 256(1) of the Income-tax Act, 1961 (hereinafter called “the Act”). In these references we are concerned with the assessment years 1972-73 to 1974-75. The questions referred to us for our opinion are as follows:

“(1) Whether, on the facts and circumstances of the case, the Tribunal was correct in law in holding that the assessee-club is a mutual concern? ‘

(2) Whether, on the facts and circumstances of the case, the Tribunal was legally justified in holding that income derived by the assessee-club from sale of liquor, etc., (in the bar account) to its members and their guests was not chargeable to tax under the Income-tax Act, 1961?

(3) Whether, on the facts and circumstances of the case, the Tribunal was legally justified in holding that the income from letting out of rooms to its members and their guests would also be exempt from tax?”

2. The core question is whether the principle of mutuality is available to the assessee which is the subject-matter of the first question referred to us. The answer to the other two questions depends upon the answer to the first question.

3. The assessee is a private limited company. The assessee returned an income of Rs. 7,510. The club lets out its premises to Lions Club, Rotary Club and individuals. In short, the income from the club property alone was returned by the assessee. According to the Income-tax Officer, the assessee was not a mutual concern and, therefore, it was liable to pay income-tax on its entire income. The Income-tax Officer accordingly assessed all heads of income in the assessment order and assessed tax accordingly on a total sum of Rs. 12,436 for the year 1972-73, a sum of Rs. 20,490 for the year 1973-74 and a sum of Rs. 16,530 for the assessment year 1974-75. The assessee agitated the same questions before the Appellate Assistant Commissioner on appeal. The Appellate Assistant Commissioner also in agreement with the Income-tax Officer rejected the claim of the assessee to its being a mutual aid concern. The assessee then moved the Appellate Tribunal. The Appellate Tribunal accepted the stand of the assessee and held that the principle of mutuality was available between the assessee and its members and, therefore, the income of the club was not liable to tax.

4. Thus the main question to be considered is whether the principle of mutuality is available to the assessee. In this connection, we must take note of some facts. Clause 5 of the memorandum of association shows that every member of the company, namely, “Ranchi Club Ltd.”, undertook to contribute to the assets of the company in the event of winding-up for payment of debts and liabilities of the company and the incidental expenses thereon. Further, in the event of winding-up, any surplus shall be paid to or distributed amongst the members of the club only in equal shares. In short, the liability to contribute in the event of winding-up or dissolution and the right to share in the surplus is confined to members. Clause 2 of the articles of association shows that only permanent members of the club shall be deemed to be members of the company. Members of the club may be resident members or non-resident members. There are, however, other categories of members. They are temporary members, honorary members and lady members. They have the right to the privileges of the club, but they have no right of attending or participating in the general meeting of the club or exercising voting rights in the management of the club. Clause 7(e) of the articles of association specifically lays down that the temporary members, lady members and honorary members shall not be deemed to be members within the meaning of clauses 4 and 5 of the memorandum of association. The privileges of the club are not restricted to members only in terms of clauses 3(1) and 3(2) of the memorandum of association. The facilities of the club are available not only to the members of the club but their friends as well. The Tribunal also noted that the premises of the club were being let out to the Rotary Club and Lions Club as well. Members of other clubs like Beldih Club, Jamshedpur Club, etc., were also permitted to participate in the activities of the club. Further, clause 3(11) of the memorandum of association provides that the recreational facilities may be extended to any other approved customers other than members.

5. The principle is now well-settled that in order to attract the principle of mutuality between the assessee and its members, it is essential that there must be complete identity between the contributors and the participators. The cardinal requirement is that all the 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, the application of the principle of mutuality depends upon the complete identity between the contributors and the participators in the surplus being satisfied. [See Municipal Mutual Insurance Ltd. v. Hills, [1932] 16 TC 430 (HL)]. It is true that no one can make a profit out of himself, but the application of this principle has to be judiciously done. In the words of S.R Das J. in CIT v. Royal Western India Turf Club Limited, [1953] 24 ITR 551 (SC), 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 carrrying passengers may also make a profit by carrying its shareholders 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 not come back to them as persons who had contributed them. An incorporated company may well be regarded as a mere instrument or 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 members is to be disregarded always and that the legal entity can never make a profit out of its members. Learned counsel for the assessee distinguished the case of CIT v. Royal Western India Turf Club Limited., [1953] 24 ITR 551 by contending that the club in that case was engaged in business/trading activity, in that, non-members also were entitled to take part in the races. For the sake of argument, I can assume that there is some difference on facts. In the instant case, the club is not a trading organisation, yet the law deducible from Royal Western India Turf Club Limited, [1953] 24 ITR 551 (SC), is that there must be complete identity between the contributors and the participators in the surplus in the event of liquidation. Applying that test, I find that in accordance with the articles of association, only permanent members were members of the club. The rest, namely, temporary members, lady members and honorary members enjoyed the privileges on sufferance. The members of the club of Jamshedpur were entitled as of right to avail of the facilities. The premises were let out on hire to Rotary Club and Lions Club. The guest room could be utilised by non-members as well, who would pay for them. Thus, the contributors were not only members but non-members as well. Thus, on these facts, it is difficult to hold that there was mutuality among the members and the club. As observed by the Supreme Court in CIT v. Kumbakonam Mutual Benefit Fund Ltd., [1964] 53 ITR 241, the essence of mutuality lies in the return of what one has contributed to a common fund, and if profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied in that view of the matter, on the facts of this case, it is difficult to hold that there is any scope for inducting the principle of mutuality.

6. Learned counsel for the assessee placed reliance upon Commissioner Of Income-Tax, Bihar v. Bankipur Club Ltd., [1981] 129 ITR 787 (Pat). The distinguishing feature, however, is that there was no provision in the bye-laws of the Bankipur Club that only permanent members would be the members of the club. There was a provision in that case stating that no outsiders could purchase drinks from the club. On the other hand, the bye-laws of the Ranchi Club clearly debar anybody other than permanent members to be treated as members. The members of the Jamshedpur Club are entitled as of right to avail of the advantages and privileges of the assessee-club. It is thus obvious that all the contributors would not be participators in the distribution of the surplus. The articles of association of the assessee-club are not on record. We are, therefore, handicapped in considering the similarity of situation between the Bankipur Club and the Ranchi Club. In that view of the matter, there is no parallel between the case of Bankipur Club, [1981] 129 ITR 787 (Pat) and the present case.

7. Learned counsel for the assessee placed reliance upon CIT v. Madras Race Club, [1976] 105 ITR 433 (Mad). In this case, their Lordships of the Madras High Court observed that the principle of mutuality is not destroyed by the presence of transactions with, or profits derived from, non-members. This case hardly supports the assessee. The conclusion of their Lordships of the Madras High Court was that the claim for exemption could not be said to have been established either on the principle of mutuality or on the principle of the absence of trade or profit motive. The only use to which this case can be put by the assessee is that income from non-members only may be treated as subject to tax leaving out the income from sales to members. I have some difficulty in accepting this proposition. Once there is want of complete identity between contributors and participators, the principle of mutuality is lost. Once that is lost, the claim for exemption must fail. It is not necessary for me to consider the various decisions cited at the Bar. In my view, upon the facts placed on record by the assessee and upon the facts found, it is difficult to hold that there was mutuality between the assessee and its members.

8. For the reasons stated above, the answer to the first question is that the Tribunal was not correct in law in holding that the assessee-club was a mutual concern. As a corollary to our conclusions on the first question, the answer to the second and the third questions also must be against the assessee and in favour of the Revenue. The answer to the second question, therefore, is that the Tribunal was not legally justified in holding that the income derived by the assessee-club from the sale of liquor (in the bar account) to its members and their guests was not chargeable to tax under the Income-tax Act. The answer to the third question is that, on the facts and in the circumstances of the case, the Tribunal was not justified in holding that the income from letting out rooms to its members and their guests would also be exempt from tax.

9. However, I would like to observe that the assessee had not placed the necessary materials in favour of its claim to mutuality. If proper facts are placed in any other year, the matter may have to be considered afresh in the light of those facts. The references are thus answered in favour of the Revenue and against the assessee on all questions, but in the special circumstances of the case, there shall be no order as to costs. Let a copy of this judgment be transmitted to the Assistant Registrar, Income-tax Appellate Tribunal, in terms of section 260 of the Income-tax Act, 1961.

B.N Agrawal, J.:— I agree.