Mutuality does not exempt bank interest on club and co-operative society deposits; third-party receipts remain taxable.

Interest earned by a club or co-operative society on fixed deposits and savings bank deposits with banks and financial institutions is not protected by mutuality. Mutuality requires complete identity between contributors to the common fund and participators in the surplus, but bank interest arises from an arm's length transaction with a third party in the character of a customer. Where corporate members are involved, the contribution is made by the juridical entity while the benefit is enjoyed by nominated natural persons, breaking the required identity. Parking surplus funds in interest-bearing deposits is a commercial deployment of funds, so the receipts are taxable.

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Issues: (i) Whether interest earned by a club or co-operative society on fixed deposits placed with banks and financial institutions, including corporate member banks, is exempt from tax on the principle of mutuality.

Analysis: The principle of mutuality applies only where there is complete identity between the contributors to the common fund and the participators in the surplus. Interest earned on deposits with banks is received in an arm's length banking transaction from a third party in the character of a customer, and not as a return of contributions from members. In the case of corporate members, the juridical entity contributes but the facilities are enjoyed by nominated natural persons, creating a real break in identity between contributor and recipient. Parking surplus funds in interest-bearing deposits is a commercial deployment of funds and the nexus with mutual benefit activities of the club is not sufficient to attract mutuality. The same reasoning applies to the co-operative society's interest receipts from fixed deposits and savings bank accounts.

Conclusion: Interest income from deposits with banks and financial institutions is taxable and the principle of mutuality does not apply.

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