Bank FD interest income for a club and application of mutuality principle

Issue

Mount View Club having 200 members received annual subscription from the members and also provided services to the members by way of recreation in its premises. The surplus funds were deposited in a bank which fetched some interest income to the club. The assessee claimed that it operates on mutuality principle and hence the surplus including bank interest is not chargeable to tax. The Assessing Officer however held that the bank interest earned by the trust had affected its status of mutual association and taxed the entire income of the club. Decide.

Opinion

The apex court in CIT v. Bankipur Club Ltd (1997) 226 ITR 97 (SC) referred to Halsbury’s Laws of England, fourth edition, Reissue Volume 23, paragraphs 161 and 162, (pages 130 and 132), relevant law is stated thus:

“Where a number of persons combined together and contribute to a common fund for the financing of some venture or object and will in this respect have no dealings or relations with any outside body, then any surplus returned to those persons cannot be regarded in any sense as profit. There must be complete identity between the contributors and the participators. If these requirements are fulfilled, it is immaterial what particular form the association takes. Trading between persons associating together in this way does not give rise to profits which are chargeable to tax.

Where the trade or activity is mutual, the fact that, as regards certain activities, certain members only of the association take advantage of the facilities which it offers does not affect the mutuality of the enterprise.

Members clubs are an example of a mutual undertaking; but where a club extends facilities to non-members, to that extent the element of mutuality is wanting”.

In CIT v. Kumbakonam Mutual Benefit Fund Ltd (1964) 53 ITR 241 (SC) it was held that the essence of mutuality is the complete identity of contributors and participants to the common fund. However, it is not necessary that in what capacity such member is contributing or participating in the mutual concern (CIT v. Indian Paper Mills Association (1994) 209 ITR 281 (Cal)). The arrangement or the relationship between the club and members should be of non-trading character (CIT v. Bankipur Club Ltd (1997) 226 ITR 97 (SC)). Even a company form of organisation could satisfy the test of mutuality (CIT v. Royal Western India Turf Club (1953) 24 ITR 551 (SC)). The concept of mutuality and exempting income from tax is based on the principle that no man can make profit out of himself, just as he cannot enter into a trade or business with himself (CIT v. West Godavari District Rice Millers Association (1984) 150 ITR 394 (AP)).

Revenue generated by means of incidental activity will not be defeating the concept of mutuality provided the dominant object of the assessee was to render assistance to the members and incidental revenue generation will not affect its mutuality status. (CIT v. Standing Conference of Public Enterprises (2010) 186 Taxman 142 (Del).

However, where members are admitted on temporary basis when the hall is let out to them for rent and later such temporary membership ceases, it could be viewed as a conduit adopted for availing tax benefit in the guise of mutual association. Such case would fail and the tax exemption could be denied (CIT v. Trivandrum Club (2006) 153 Taxman 481 (Ker.)).

Surplus funds deposited with institutional members and interest income thereon was held as breach of the principle of mutuality and hence was held as chargeable to tax in Madras Gymkhana Club v. Dy.CIT (2010) 328 ITR 348 (Mad). Similar such view was taken in favour of revenue in CIT v. Common Effluent Treatment Plant, (Thane-Belapur) Association (2010) 328 ITR 362 (Bom); Sports Club of Gujarat Ltd v. CIT (1988) 171 ITR 504 (Guj).

Recently, in Madras Cricket Club v. ITO (2011) 334 ITR 238 (Mad) following the decision in the case of Madras Gymkhana Club (Supra) it was held that the interest income from fixed deposits in a bank was chargeable to tax and such portion of income will not be eligible for tax relief.

Decision in favour of the assessee could be found in Canara Bank Golden Jubilee Staff Welfare Fund v. Dy.CIT (2009) 308 ITR 202 (Karn) in which it was held that interest on investments and dividend income on shares as non-taxable incomes applying the principle of mutuality in spite of such incomes flowing from outsiders i.e. non members.

Since the club has no dealing with outside body, the income or surplus earned from the members could not be subjected to tax. However, the interest income earned by parking surplus funds is a prudent decision for earning income which might be subjected to tax. Decisions favouring assessee and revenue show that the issue has not attained finality.

However, it is opined that only such interest income would be chargeable to tax in any case and the income earned from services provided to the members will fall within the concept of mutuality and hence would not be liable to tax.

Position under DTC: The principle of mutuality is not separately dealt with in DTC. However, the principles enunciated with regard to mutuality by means of various court judgments would continue to remain applicable in the DTC regime also.

Source: The Tax Referencer, Volume 120 dt.25.07.2011
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