2019 (11) TMI 657 - HC - Income Tax

Supreme Court rules club income from bank deposits taxable under Income Tax Act

M/s. The Coonoor Club Versus The Income Tax Officer, Ward I (2) Ooty, The Nilgiris.

The Supreme Court dismissed the writ petitions challenging assessment orders under the Income Tax Act for various years, where a club's income from bank ... Income earned by the club from deposits made in banks - claimed to be exempt, applying the principal of mutuality - HELD THAT:- The taxability of income earned by similarly placed clubs was the subject matter of challenge before the Supreme Court in the case of Bangalore Club V. Commissioner of Income Tax and others [2013 (1) TMI 343 - SUPREME COURT] and the Supreme Court held that interest earned by clubs from banks would not fall within the ambit of the principles of mutuality and would thus be liable to tax in the hands of the clubs. Even in this case, the exemption is sought on identical facts, that is, on income that has been earned by the petitioner club from its investments made with banks. Thus the judgment and the ratio thereof as extracted above will cover the facts and circumstances of the present case on all fours. These Writ Petitions are thus dismissed. Issues: Challenge to assessment orders under the Income Tax Act for multiple assessment years based on the principle of mutuality.Analysis:1. Challenge to Assessment Orders: The petitioner contested assessment orders dated 28.10.2008 and 27.11.2008 issued under the Income Tax Act for various assessment years. The impugned orders taxed income earned by the club from bank deposits claimed as exempt under the principle of mutuality.2. Taxability of Club Income: The Supreme Court in the Bangalore Club case held that interest earned by clubs from banks does not fall under mutuality principles and is taxable. The Court analyzed the lack of identity between contributors and participators, absence of benefits to club members, and funds being used for commercial banking operations, thus breaching conditions for mutuality exemption.3. Judicial Precedents: Referring to the Kumbakonam Mutual Benefit Fund case, the Court emphasized that income from bank deposits, even with member banks, carries a commercial taint, making it ineligible for mutuality exemption. The Court stressed the need for direct benefits to the club's functioning to satisfy conditions for tax exemption under the mutuality principle.4. Doctrine of Mutuality: The Court reiterated that while surplus amounts under mutuality are exempt from tax, interest earned by clubs from bank investments does not qualify for such exemption. The judgment highlighted the distinction between commercial transactions and genuine mutuality, cautioning against claiming double benefits and engaging in profit-oriented activities disguised as club operations.5. Dismissal of Petition: Given the similarity of facts with the precedent cases and the lack of merit in the club's claim for tax exemption, the Court dismissed the writ petitions and connected miscellaneous petitions without costs. The judgment reaffirmed the inapplicability of mutuality principles to income derived from bank investments by clubs, emphasizing the commercial nature of such transactions.