Mutuality Doesn’t Exempt Interest Income of Clubs Even If Banks are Corporate Members | SC

Case Details: Secundrabad Club etc. vs. CIT - [2023] 153 taxmann.com 441 (SC)

Judiciary and Counsel Details

• • Mrs B.V. Nagarathna & Prashant Kumar Mishra, JJ.

Facts of the Case

Assessee-club was a mutual association of persons existing solely for the benefit of its members. The main object of the club was to promote social activities, including sports and recreation, amongst its members and various services can be availed by its members.

The surplus income generated by the club consists of payments made by the members deposited in as fixed deposits, post office deposits, national savings certificates etc.

The issue before the Supreme Court was:

“Whether the deposit of surplus funds by Clubs by way of bank deposits in various banks wouldn’t be subject to tax in the hands of the Clubs considering the principle of mutuality?”

Supreme Court Held

The Supreme Court held that the principle of mutuality is rooted in common sense. This implies that a person cannot earn profit from an association that he shares a common identity with. The essence of the principle lies in the commonality of the contributors and the participants who are also beneficiaries. There has to be a complete identity between the contributors and the participants. Therefore, it follows that any surplus in the common fund shall not constitute income but will only be an increase in the common fund meant to meet sudden eventualities.

The principle of mutuality would not apply to interest income earned on fixed deposits made by the Clubs in the banks, irrespective of whether the banks are corporate members of the club or not.

If there is an entry of a third party or non-member to utilize the funds of the club and return the same with interest, then the parties’ relationship is not on the basis of privity of mutuality. The essential condition of mutuality, i.e., identity between the contributors and participators, would end. The relationship would then be like any other commercial relationship, such as that between a customer and a bank where the customer makes a fixed deposit to earn an interest income.

If the principle of mutuality is to apply, where many people who contribute to a fund are ultimately paid the surplus from the fund. In that case, it is a mere repayment of the contributors’ own money. However, if the very same surplus fund is not applied for the common purpose of the club or towards the benefit of the members of the club directly but is invested with a third party who has the right to utilize the said funds, subject to payment of interest on it and repayment of the principal when desired by the club, then, in such an event, the club loses its control over the said funds.

When surplus funds of a club are invested as fixed deposits in a bank, and the bank has a right to utilize the said fixed deposit amounts for its banking business subject to repayment of the principal along with interest, the identity is lost.

Thus, the interest income earned on fixed deposits made in the banks by the Clubs has to be treated like any other income from other sources.