2011 (8) TMI 752 - HC - Income Tax

Assessee is a social club not registered as association or society - receives monthly subscription for use of facility from its members - earned interest on the fixed deposits kept by it with Andhra Bank Lloyds Finance Ltd etc which are its corporate members - Revenue contended interest accrued on the fixed deposits parked with commercial banks is liable to tax - Assessee replied corporate members are not tainted with commerciality interest income not taxable on the principle of mutuality - Held That - An unregistered association like the Secunderabad club parking their surplus funds with corporate member banks to earn interest is altogether different from an association of persons lending money only to its members. Therefore if an incorporated entity is engaged in trade the profit from it even if they are transactions with members would be taxable and the principle of mutuality would have no application. Further In view of Bankipur Club Ltd. (1997 -TMI - 5595 - SUPREME Court) a host of factors need to be considered to arrive at a conclusion as to at what point does the relationship of mutuality end and that of trading begin . - the nature of the transaction between the assessee and the bank/banks would disqualify application of the principle of mutuality. - Decided against the assessee.

Issues Involved:

1. Taxability of interest income from fixed deposits with banks and financial institutions under the principle of mutuality.
2. Applicability of the principle of mutuality to interest income earned from deposits with corporate members.
3. Distinction between contributors and participants in the context of mutuality.
4. Relationship between mutuality and business activities.

Issue-wise Detailed Analysis:

1. Taxability of Interest Income from Fixed Deposits:

The primary issue was whether interest accrued on fixed deposits parked with commercial banks is liable to tax. The Revenue contended that such interest income is taxable, while the assessee argued for exemption under the principle of mutuality. The court examined the factual matrix, noting that the assessee club deposited funds with banks and financial institutions, which were also corporate members of the club. The Assessing Officer concluded that the deposits were accepted by the banks in their capacity as general public depositors, not as members of the club, thereby disqualifying the application of mutuality.

2. Applicability of the Principle of Mutuality to Interest Income Earned from Deposits with Corporate Members:

The court analyzed whether the interest income earned from deposits with corporate members of the club could be exempt under the principle of mutuality. The court noted that the principle of mutuality requires complete identity between contributors and participants. The corporate members, being juridical persons, nominate natural persons to avail the club's facilities, creating a dichotomy between contributors and participants. The court emphasized that the mutuality principle ceases when the club deposits funds with banks to earn interest, as this constitutes a business activity.

3. Distinction Between Contributors and Participants in the Context of Mutuality:

The court highlighted the distinction between ordinary/permanent members and corporate members. Ordinary members contribute to the club, avail facilities, and receive surplus funds. In contrast, corporate members contribute funds but their nominees, who are natural persons, avail the facilities. This lack of direct participation by corporate members themselves disqualifies the application of mutuality. The court also noted the automatic termination of corporate membership after ten years, further undermining the mutuality claim.

4. Relationship Between Mutuality and Business Activities:

The court examined the relationship between mutuality and business activities, emphasizing that mutuality ends when the club engages in profit-earning activities such as depositing surplus funds in banks. The court referred to precedents where income derived from business activities, even if involving members, was held taxable. The court concluded that the interest income from deposits with banks, even if they are corporate members, is taxable as it constitutes a business activity.

Conclusion:

The court concluded that the principle of mutuality does not apply to interest income earned from deposits with banks and financial institutions, even if they are corporate members of the club. The interest income is taxable as it arises from a business activity, not from mutual contributions and participation. The appeals by the Revenue were allowed, and the orders of the Income-tax Appellate Tribunal were set aside. The court also addressed similar issues in the case of a cooperative society, reiterating that income from rent and bank interest is taxable.

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