Principle of Mutuality not Applicable on Income Earned by Clubs through its Assets and Resources, from Persons who are not Members, Income Tax Applicable: Supreme Court [Read Judgement]

In a major decision the Supreme Court has ruled that the principle of mutuality is not applicable on income earned by clubs through its assets and resources, from persons who are not members and hence taxable under the Income Tax Act, 1961.

In the present case the Supreme Court was dealing with a batch of Special Leave Petitions arising from the decision of the Andhra Pradesh and Madras High Court, pertaining to the Secunderabad Club, Madras Gymkhana Club, Madras Cricket Club etc. The High Courts in the impugned decision had held that the interest earned on the bank deposits made by the assessee Clubs is liable to be taxed in their hands and that the principle of mutuality would not apply.

The central theme of the submissions advanced by Arvind Datar, senior counsel appearing for some of the appellant Clubs is that the two judge Bench Judgement of the Supreme Court in Bangalore club is not a binding precedent and therefore the same calls for reconsideration. The Counsel submitted that the investment of surplus income made by the Clubs in the form of Fixed Deposits, Post Office Deposits etc. were exempt from payment of income tax on the basis of the mutuality principle.

Senior Advocate Firoze Andhyarujina and Pritesh Kapur also appeared for the appellants and contended that in Bangalore Club, a coordinate Bench of this Court has not considered the Order passed in Cawnpore Club and hence, there are now two judgments which are diametrically opposite on the question of the application of the principle of mutuality to interest income earned by clubs.

Additional Solicitor General of India, Balbir Singh appeared for the Union of India and argued that interest accrued on the fixed deposits made by the clubs is similar in nature to any other banks’ deposit earning an interest made by any other customer of the bank during the course of banking operations and hence, it has a taint of commerciality which is fatal to the principle of mutuality.

In Bangalore Club, the Supreme Court had ruled that the surplus amount which is received as contribution from the members is exempt from tax under the doctrine of mutuality. However, the interest earned by the assessee Clubs on the surplus funds invested in FDs with the corporate member banks will not fall within the ambit of the mutuality principle.

In it was observed by the Supreme Court in Cawnpore Club decision that the income earned by the assessee from the rooms let out to its members could not be subjected to tax.

A Two-Judge Bench of the Supreme Court comprising Justice BV Nagarathna and PK Mishra observed that “Consequently, we hold that the principle of mutuality would not apply to interest income earned on fixed deposits made by the appellant Clubs in the banks irrespective whether the banks are corporate members of the club or not. The interest income earned on fixed deposits made in the banks by the appellant Clubs has to be treated like any other income from other sources within the meaning of Section 2(24) of Income Tax Act, 1961.”

The Bench also noted that if any income is earned by the Clubs through its assets and resources, from persons who are not members of the Clubs, such income would also not be covered under the principle of mutuality and would be liable to be taxed under the provisions of the Income Tax Act.

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