LI Network
Published on: 19 August 2023 at 13:08 IST
The Apex Court has delivered a landmark verdict, asserting that interest earned on bank deposits made by clubs is now liable to be taxed under the Income Tax Act of 1961.
The verdict further established that the principle of mutuality, often cited to exempt such transactions from taxation, would not be applicable in this context.
The Supreme Court reached this conclusion while addressing a series of appeals on the matter.
The central question at hand was whether the surplus funds deposited by various appellant clubs into bank accounts should be subject to taxation, or if the principle of mutuality would shield them from such liabilities.
The court’s two-judge bench, composed of Justice B.V. Nagarathna and Justice Prashant Kumar Mishra, rendered the verdict. They contended that interest income originating from fixed deposits held by these clubs within banks should be treated on par with any other source of income, as defined in Section 2(24) of the Income Tax Act, 1961.
The court clarified the application of the principle of mutuality, explaining that when club facilities are extended exclusively to contributing members, there exists a fundamental alignment between the contributors and beneficiaries, warranting the principle’s application. Conversely, if the same club amenities are offered to non-members or the public, with the aim of generating additional income, it transforms into a commercial endeavor, thereby eliminating the protective shield of mutuality.
Senior Advocate Arvind Datar represented the appellant clubs in court, while Senior Advocate Balbir Singh advocated on behalf of the respondent-revenue.
The legal dispute stemmed from a series of appeals originating from the Andhra Pradesh High Court and the Madras High Court, involving clubs such as the Secunderabad Club, Madras Gymkhana Club, Madras Cricket Club, The Coimbatore Cosmopolitan Club, Madras Club, M/s Wellington Gymkhana Club, and M/s the Coonoor Club.
In a uniform stance, the High Courts decreed that interest derived from bank deposits of these clubs should be subject to taxation and that the principle of mutuality was inapplicable.
Dissatisfied with these judgments, the clubs in question sought redress from the highest judicial authority—the Apex Court.
The crux of the matter before the Supreme Court was whether the interest income accrued by these clubs should be considered under the umbrella of the principle of mutuality, consequently exempting them from tax obligations.
The court, in its deliberation, articulated the essence of the principle of mutuality. Rooted in common sense, it stipulates that a person cannot profit from their own association—a mutual identity between contributors and beneficiaries is necessary.
However, when club facilities are extended to non-members or the public, the aspect of mutuality diminishes. This position was reiterated through reference to the judgment in the case of Bangalore Club V. Commissioner of Income Tax (2013) .
The court also addressed the assertion that the judgment in the case of Bangalore Club did not hold as a binding precedent due to its non-reference to a prior judgment in Cawnpore Club. Nevertheless, the court found the reasoning in the Bangalore Club judgment valid and applicable to the current cases.
Additionally, the court held that the principle of mutuality would not safeguard interest income accrued from fixed deposits in banks, regardless of the bank’s corporate membership status within the club.