India: Activities Of Club, Charitable Or Not Charitable

A Club is an association of two or more people united by a common interest or goal1. Clubs usually provide various facilities to people such as Swimming Pools, Sports Facility, Pavilion, Board Room, Terrace, Party Halls, Bar and Restaurant etc. In many cases Clubs get themselves registered with the Income Tax Authorities u/s12A of Income Tax Act, 1961 [hereinafter referred to as "ITA"] as Charitable Organization so that their income gets exempted u/s 11 & 12 of ITA. In Order to get registered as a Charitable Organization, the club has to shown that it has been set up for some charitable purpose as defined u/s 2(15) of the ITA. The relevant paragraph of definition of Charitable purpose can be read as follows: "Charitable purpose includes relief of the poor, education, medical relief, preservation of environment (including watersheds, forests and wildlife) and preservation of monuments or places or objects of artistic or historic interest, and the advancement of any other object of general public utility. Provided that the advancement of any other object of general public utility shall not be a charitable purpose, if it involves the carrying on of any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of use or application, or retention, of the income from such activity"

The Charitable purpose of Clubs usually gets covered under the term "advancement of any other object of general public utility". As the term "advancement of any other object of general public utility" is very wide, the Revenue Department during scrutiny of the return of assessee club or while granting registration to a Club u/s12A, may question the charitable nature of the activities, if the revenue department is of the opinion that the assesse club is trying to avoid tax by carrying on business activities under the garb of charitable activity. If assessee club is not able to satisfy the Assessing Officer regarding the charitable nature of the activity of the club the assessing officer treats the income of the clubs as business income and disallows the exemption on it. In some cases, the tussle between assessee clubs and the revenue department, regarding the charitable nature of the activity of the clubs, have reached the Income Tax Tribunal and Courts. Some of the Cases where the Tribunals and Courts have discussed the Charitable nature of the Activities of the Club are as follows:-

1) Whether the income of the assessee club from casual member amounts to commercial activity as required under Section 11 (4A) of the Act or not2?

14. "....... we would also like to extract below the relevant discussion contained in the order of the Tribunal with which we are in agreement:-

"We have considered the rival contentions carefully gone through the order of the authorities below and also perused the memorandum and article of association of the assessee club. As per clause-9 of the articles of association, the club was entitled to admit various classes of persons which also included casual members in addition to permanent and tenure members. The casual members were also using the Golf Course in the same manner as permanent and tenure members were using. The AO has declined fees received from the casual members as income u/s 12A merely because assessee club was not maintaining separate books of accounts regarding this business activity. As per AO it was a business income and not income from the mutual interest that was not liable for exemption u/s 11. There is no merit in the AOs action for treating the fees received from the casual members as business income. The assessee club was maintaining required records with regard to income and expenditure. There is no requirement of maintaining separate accounts with respect to fees received from different kinds of members, as provided in the articles of Association........... As per the articles of the club, the casual members were allowed the usage of green to play the game of golf. The casual members were allowed to play at the club, when they are in Delhi. There is no finding by the AO to the effect that activities of the club during the year were not covered by the definition provided u/s 2 (15) i.e. Charitable purpose which includes relief of poor, educational and advancement of any other object of general public utility. In order to satisfy the requirement of being an "object of general public utility" within the meaning of section 2 (15) of the Act, it is necessary that the benefit should reach each and every person of the country or the state. It is sufficient if it reaches a sizable number of members of the Public. It is therefore clear that for an association to be recognized and given benefit of Section 12(A) of the I.T. Act, its objectives listed should cover any one or all of the following laid down principles:-"

A. Object of General Public Utility within the meaning of Section 2 (15) means that the benefit need not reach each and every person. It is sufficient if it reaches a sizable number of members of the public.

B. To serve as charitable purpose object should be to benefit the mankind and not the whole of mankind in a particular country or province.

C. The section of public which is expected to benefit should be well defined even though it does represent only a portion of the mankind.

D. The intention of providing the benefit to portion of the public as individual should be clearly spelled out.

2) Whether the promotion of badminton shuttle cock, limited to the members of club only, will be a charitable activity?3

"In our view, offering of the so called service to a particular section as in the instant case to members of the assessee organization only does not in any way lead to a charitable activity for the purpose of sec.2(15) of the Act. We reiterate that a charitable activity can not be confined to a particular section but for the society at large. In view of these facts and circumstances, instead of restoring the issue back to the file of CIT, we reject the assessee's contentions by holding that it is not engaged in any charitable activity."

3) Whether income earned from the activities relating to providing food, liquor and facility for playing cards and other such games would qualify for deduction under the provisions of section 11 of the Income Tax Act, 1961?4

"In respect of food and liquor, we observe that on perusal of order of Tribunal dated 28.1.2008 (supra) that Tribunal after considering the decision of Special Bench of ITAT, Mumbai in the case of Breach Candy Swimming Bath Trust, Mumbai V/s ITO (AY-1990-91) dated 31.7.2003 interalia held that business of Bar and Restaurant is property held under trust for a charitable object within the meaning of section 11(4), not affected in any way by section 11(4A) of the Act. Thus, the assessee trust is entitled to exemption u/s 11 for all its income except for income providing facilities of playing cards......In view of above and respectfully following the earlier orders of the Tribunal, we confirm the order of ld. CIT(A) that assessee is entitled to exemption u/s 11 for its income except income providing facilities of playing cards and accordingly reject grounds of appeal taken by the department."

4) Whether receipts for social functions, pavilion, board room and open terrace would not be eligible for exemption under section 11 of the Income-tax Act?5

"We observe that the similar issue is also covered by the order of Tribunal for assessment year 2003-04 dated 28.1.2009 in ITA No.6042/Mum/2006 and the relevant para 2.1 of the said order reads as under :

"2.1 A perusal of the above submission clearly reveals the true nature the activities undertaken by the assessee. The activities of the assessee Club on Social Functions, Pavilion, Board Room, Terrace and Card Room were for personal purposes and are clearly not for the object of the Club. The only exception to this decision of ours is the functions organized on Independence Day, Republic Day, Diwali celebrations and likewise only. Therefore, the activities not covered by the decision of the Co-ordinate Bench would not qualify for exemption u/s 11 of the Act. In view of this, the decision of the ld. CIT(A), in respect of activities of the assessee not covered by the said decision of the Co-ordinate bench cannot be sustained. Therefore, the AO is directed to allow the expenses as per our directions on such activities of the assessee which are covered by the decision of the Hon'ble Co-ordinate Bench. To this extent appeal of the revenue is allowed. In view of above and respectfully following the order of Tribunal (supra), we reject Grounds No.3 and 4 of the appeal taken by assessee."

5) Whether the Income of assessee club from Non members for Purposes of playing cards and also having Permit Room Bar and Restaurant for catering and soft drinks and hiring income from Marriage Hall/ground is exempt under principal of mutuality and u/s 11 even though these activities of the assessee are hit by first proviso to section 2(15) of the IT Act?6

"Though the assessee club is also offering the facility of sports to its members that itself, cannot partake the character of charitable activity. It is not the case of the assessee trust that such sports activities are provided or have resulted into any benefit to the public at large or any section of the society. The sports activities accompanied by facilities like liquor bar, playing cards, restaurant, marriage hall, catering services etc. limited to a certain group of persons i.e. members of the club cannot be said to be a charitable activity from which any benefit is derived by the public or section of the public rather the benefits are limited to high and rich distinguishable group of persons i.e. members of the club only. There is no element of charity involved in such an activity rather the activities of the club are meant for leisure and pleasure of the members of the club and the membership has been restricted to certain individuals not to any section of the society.

We therefore do not find any infirmity in the order of the AO in holding that the activities of the assessee trust do not fall in the definition of charitable purpose as defined under section 2(15) of the Act.

So far the contention relating to benefit of mutuality is concerned, we may observe that the AO himself has observed that the facilities of the club are restricted to its members only and are not open to general public. However, he has observed that the assessee has earned some income from non members also. He has also observed that the assessee has earned royalty income from restaurant, decorators and halls, swimming-pools, club house, collection of room rent etc. We may point out that if the services of restaurant, bar room, swimming-pool etc. are restricted to members or their family members or guests only, then the income from those services cannot be said to be business income of the society and the benefit of mutuality will be available to the assessee in relation to such facilities/services. However, the income which has been earned by the assessee by providing facilities to non members is required to be treated as business income of the assessee."

CONCLUSION

Clubs in order to get the benefit of exemption of income under Income Tax get themselves registered with the Income Tax Authorities as Charitable Organization. Clubs usually get covered in the definition of charitable purpose under the term "advancement of any other object of general public utility". In order to ensure that the income of the club is not treated as business income the facilities of the club should be accessible to a reasonable size of population not necessarily the entire population, the section of public which is expected to benefit should be well defined even though it does represent only a portion of the mankind, the intention of providing the benefit to portion of the public as individual should be clearly spelled out, the incidental activities of clubs such as providing the facility of bar and restaurant will be treated as property of the club. Activities such as playing cards will not be considered as charitable activity also Income of the club for private functions will be treated as business income of the club.

Footnotes

1. http://en.wikipedia.org/wiki/Club

2. Commissioner of Income Tax Vs Delhi Golf Club Ltd. [ITA No.1757 of 2010] decided by Hon'ble Delhi High Court, order pronounced on 30th March, 2011

3. Yono Club Trust vs The Asst. Commissioner of Income Tax [I.T.A. No.2124/Mds/2012], decided by Hon'ble ITAT, Chennai "C" Bench , order pronounced on 26th August, 2013

4. Assistant Director of Income Tax (Exempt)-II (1) vs M/s Otter Club [I.T.A. No.2250/Mum/2012], decided by Hon'ble ITAT, Mumbai "C" Bench , order pronounced on 13th September, 2013

5. M/s Otter Club vs Dy. Director of Income Tax (Exempt)-II (1) [I.T.A. No.2657/Mum/2012], decided by Hon'ble ITAT, Mumbai "C" Bench , order pronounced on 13th September, 2013

6. ADIT (E)-II(2) vs M/s. Navi Mumbai Merchants Gymkhana [ITA No.196/M/2013], decided by Hon'ble ITAT, Mumbai "B" Bench , order pronounced on 21st May, 2014

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