TaxTMI 
TaxTMI 
TaxTMI 
2019 (11) TMI 657
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.... the impugned order brings to tax, in the re-assessment proceedings, income earned by the club from deposits made in banks that were claimed to be exempt, applying the principal of mutuality. 2. 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 (350 ITR 509) 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. 3. The relevant portion of the aforesaid judgment is extracted below: '25. This brings us to the facts of the present case. As aforesaid, the assessee is....
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....ality is not satisfied. 27. As aforesaid, the second condition demands that to claim an exemption from tax on the principle of mutuality, treatment of the excess funds must be in furtherance of the object of the club, which is not the case here. In the instant case, the surplus funds were not used for any specific service, infrastructure, maintenance or for any other direct benefit for the member of the club. These were taken out of mutuality when the member banks placed the same at the disposal of third parties, thus, initiating an independent contract between the bank and the clients of the bank, a third party, not privy to the mutuality. This contract lacked the degree of proximity between the club and its member, which may in a distan....
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....he club, or that they did not loan them out. Therefore, clearly, the club did not give, or get, the treatment a club gets from its members; the interaction between them clearly reflected one between a bank and its client. This directly contravenes the third condition as elucidated in Styles and Kumbakonam Mutual Benefit Fund Ltd. cases (supra). Rowlatt J., in our opinion, correctly points out that if profits are distributed to shareholders as shareholders, the principle of mutuality is not satisfied. In Thomas Vs. Richard Evans & Co. (supra), at pp. 822-823, he observed thus : "But a company can make a profit out of its members as customers, although its range of customers is limited to its shareholders. If a railway company makes a profi....
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....ual Benefit Fund Ltd. case (supra). The facts in that case were that the assessee, namely, Kumbakonam Mutual Benefit Fund Ltd., was an incorporated company limited by shares. Since 1938, the nominal capital of the assessee was Rs. 33,00,000/- divided into shares of Rs. 1/- each. It carried on banking business restricted to its shareholders, i.e., the shareholders were entitled to participate in its various recurring deposit schemes or obtain loans on security. Recurring deposits were obtained from members for fixed amounts to be contributed monthly by them for a fixed number of months as stipulated at the end of which a fixed amount was returned to them according to published tables. The amount so returned, covered the compound interest of ....
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....e benefit of the doctrine of mutuality in respect of the surplus amount received as contributions or price for some of the facilities availed by its members, before it is deposited with the bank. This surplus amount was not treated as income; since it was the residue of the collections left behind with the club. A façade of a club cannot be constructed over commercial transactions to avoid liability to tax. Such setups cannot be permitted to claim double benefit of mutuality. We feel that the present case is a clear instance of what this Court had cautioned against in Bankipur Club (supra), when it said: "... if the object of the assessee company claiming to be a "mutual concern" or "club", is to carry on a particular business and ....