The hazards of golf and taxes

The hazards of golf and taxes

Hot on the heels of furious environmentalists and conservationists, the Comptroller and Auditor General of India (CAG) has turned its inquisitorial eye on the Delhi Golf Club. In its latest report on direct taxes, the CAG has taken exception to what it calls ``improper exemption under Section 10(23) of the Income Tax Act, 1961, to the Capital's prestigious club.'' The Delhi Golf Club Ltd, which was set up in 1949 for the promotion and encouragement of golf, had applied for tax exemption under Section 10(23).

This has been duly renewed over the last few decades. Under Section 10(23), any income of a sports association or institution may be notified for tax exemption, but it shall not remain in effect for more than three assessment years. This time limit was put in after the Act was amended in 1990. The section, however, also underlines that exemption does not apply to profits and gains, for which separate books have to be maintained. These can be called for inspection by the central government.

A CAGscrutiny of the Club's records revealed some startling facts. The only return of income filed by the Club in recent times was on December 11, 1991 for the assessment year 1991-92. Previous to that, the last return filed was for the year 1976-77. The Club has pleaded that it did not need to file returns earlier as the Government's approval of its application for tax exemption in 1967 did not specify any time limit. Since the time limit clause was introduced only in 1990, the earlier exemption was valid upto 1989. But its failure to file returns for the following assessment year, 1990-91, alone led to a loss of Rs 82.94 lakh (including interest) to the state. This tax effect is computed only on casual membership fees and income from beverages. Catering services, the swimming pool, the bridge room, etc could also have been taxed, but no information was available on them.

A closer look at past accounts (1987-88 to 1991-92, excluding 1990-91) also revealed that the sales of wine and beverages, the cateringservices and the swimming pool constituted about 72 per cent of total receipts. As suggested by the Income Tax officers, says the CAG, the provision of such facilities could be termed as the main activity of the Club. Golf was a secondary pastime. Also, the Delhi Golf Club was granted this exemption while the application of the the Chandigarh Golf Club, which hosts similar activities, was rejected.

Strangely, the Income Tax Department is contesting the writ petition filed by the Chandigarh Golf Club against the rejection, thereby strengthening the view that the notification for tax exemption in respect of the Delhi Golf Club was improper, says the CAG. According to the audit report, the tax notification enabled the Delhi Golf Club to escape the rigours of the normal assessment process. Had it taken place, incomes from casual and non-members would have been taxed in accordance with the Supreme Court judgements.

In its reply to the CAG, the Finance Ministry has brusquely refuted the allegations, saying thatno irregularity was committed by notifying the income of the Delhi Golf Club as exempt during the pendancy of the writ petition filed by the Chandigarh Golf Club, as the matter was yet to be decided when the renewed notification of the former was issued in May 1998. Further, it stated that the fact that the sale of liquor and other provisions constituted 72 per cent of total reciepts cannot be a criterion for determining the primary nature of the Club, whose membership fees are dismally low. A member who pays less than Rs 100 per month on fees may spend several times as much on liquor and snacks. It also argued that the department is already seized of the matter regarding non-filing of tax returns for 1990-91 and anyway, the case of the Delhi Golf Club is different from others like the National Sports Club of India, as it does not promote sports in general but a specific game.

But the war of words between the CAG and the Finance Ministry did not end there. The CAG dismissed the explanations, saying that theaudit scrutiny of the relevant files of the Finance Ministry and the Chief Commissioner of Income Tax, Chandigarh, clearly indicate that the Ministry had contested the writ petition filed by the Chandigarh Golf Club on December 7, 1992, against denial of exemption under Section 10(23). Two, the Ministry uses dual yardsticks to measure the activities of a club. While it believes the sale of liquor, etc cannot be a criterion for determining its primary activity, the Central Board of Direct Taxation took a contrary stand in the case of the Chandigarh Golf Club vs Union of India: running a bar was not essential for promoting golf.

In the same case, the CBDT also argued that since the purchase of beverages, whisky etc constituted a major portion of expenditure, it was spent on other aims and objectives, not qualifying the Chandigarh Club for exemption under Section 10(23). Three, but for the audit note issued by CAG, the reassessment for the year 1990-91 would have escaped notice. Also, the fact that the noticefor reassessment was issued only on March 10, 1999, after the receipt of the audit note on the Delhi Golf Club by the CBDT belies the view promoted by the latter that it was seized of the matter.

Four, while the Ministry tries to draw a fine distinction with the case of clubs like the NSCI on the grounds that they promote sports in general and not golf in particular, the case of the Chandigarh Golf Club (which was denied exemption) or the Royal Calcutta Club and the Bombay Presidency Golf Club, which have not been given exemption, is similar. It exposes the differential treatment given to the Delhi Club vis-a-vis others.

Finally, scrutiny of one assessment year alone (1990-91) revealed a revenue loss of Rs 82.94 lakh. Therefore, the Club gains because of its protection under income tax laws while denying the government of its rightful dues.