The surplus generated by social leisure golf equipment and its taxation

Be it the wealthy historic tapestry and legacy of the previous and famend golf equipment just like the Chelmsford Club in Lutyens’s Delhi, or the ‘quintessential third space’ of the Gurugram/Mumbai based mostly new-age club- The Quorum, one factor which at all times stay common and the widespread 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 direction of numerous social occasions and gatherings, and different related prices in direction of the privileges, conveniences and facilities offered by such golf equipment to the respective members. That begs the query what’s fallacious 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 Income Tax Act, what’s taxed is the revenue/surplus earned by an individual arising out of some industrial enterprise transactions achieved with another individual. As against 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 capabilities on the underlying philosophy of pooling of widespread sources in 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 direction of offering numerous amenities, facilities, privileges, and for the usage of membership property. Where quite a lot of individuals collectively contribute to a standard pool for the financing of some widespread goal and on this respect don’t have 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 numerous leisure providers and amenities provided by such social golf equipment for the standard privileges, benefits, conveniences and lodging, completely to such members solely and to not any non-member or outsider, usually are not with any revenue motive, and usually are not tainted with commerciality. The surplus, if any, can be utilised within the furtherance of the aims of such golf equipment, in conformity with the precept of mutuality solely, and no private acquire is derived from the identical.

The Supreme Court, in a number of landmark judgements, within the instances of Chelmsford Club, Bankipur Club, Ranchi Club and Cricket Club 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 idea 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 might solely be expended or returned to themselves.

In the absence of those three circumstances, the revenue tax immunity defend, as conferred by the doctrine of mutuality, is not going to be out there to such social golf equipment. For occasion, if a membership, rents out its banquet corridor for marriage or different events to non-members from most people or opens up its gymnasium/billiards pool/swimming pool for normal public and collects utilization prices from them in consideration of the identical, and earns a surplus out of this, then such surplus will probably be taxable within the fingers of such membership, because it has arisen out of a industrial exercise achieved with non-members.

However, if the membership earns some surplus out of the collective charges/prices obtained by it from its members in direction of utilization of its banquet corridor/gymnasium/billiards pool/swimming pool by its members solely, who has paid the membership charges, and such surplus is being utilized for offering additional amenities and facilities to its members solely, then such surplus is not going to be taxable by advantage of the doctrine of mutuality.

However, the doctrine of mutuality just isn’t recognised within the regulation pertaining to items and repair tax (GST) and at the moment 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% below 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.

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Updated: 14 Jun 2023, 10:48 PM IST